Private money lender: a lender (just to be clear, we’re referring to fund based lenders more so than someone sourcing private individuals) who lends based on great care to borrower background, quality of securing property, and the high expectation of repayment based on borrower success. These lenders can deliver capital quickly with less regulation, but typically at a premium over a traditional bank.
Hard money lender: a lender who’s model allows him/her to deliver capital quickly at a heavy premium over a traditional bank, and who generally bases their decision off of the securing asset value. Hard money lenders typically choose to lend with the presumption that they will acquire the securing property to produce the greatest yield.
People choose the private money or hard money route for a number of reasons. Maybe they are in need of a construction loan a traditional bank won’t fill. Maybe the person is an International Buyer and has difficulty obtaining a traditional bank loan. Or perhaps they are a seasoned domestic borrower, have spotted a deal and a traditional bank simply can’t deliver the capital fast enough to allow them to capture the time sensitive profit opportunity.
Whatever the reason, private money lenders and hard money lenders each have a valuable niche in the marketplace. Interchangeable though? The short answer is no, not exactly. Although there are commonalities in speed and simplicity, it is principally a difference in philosophy that sets the two apart.
Differences and Distinctions:
- Philosophy
- Agenda
- Flexibility Post-Closing
- Property Type and Location
For the most part, hard money lenders focus solely the securing asset value rather than borrower quality or their ability to smoothly exit a loan. Private money lenders’ primary focus is also asset value and collateral quality, but private lenders want to design a loan that works for all parties involved. So the borrowers must have a sensible plan, skill and experience to pull their plan off. Private lenders measure their success, in part, by the borrower’s success. Hard money lenders measure their success by the yield they receive at the end of it all. Neither strategy is more “correct” than the other, it’s is simply a difference of wanting to build relationships for repeat business, or making one time deals as they come. Typically speaking, private fund based lender terms will be more attractive as they are seeking a higher caliber transaction.
Getting the real estate back through foreclosure is typically a private money lender’s last resort. Plan A: Get paid back (see 1. above). Fund based private lenders obtain their profits through fund management fees and to a similar extent, loan fees. The quality of their managed fund is measured in part by the fund’s non-performing asset percentage, so private lenders are motivated to make loans that work. Loans are largely underwritten and designed around a borrower’s ability to repay and make themselves a profit, otherwise it may not be worth doing at all. Hard money lenders will often “lend to own” as part of their strategy. This means their approach may involve a loan designed solely to protect and profit the lender with less concern for what works best for the borrower. Private money, in many ways, is the evolution and refinement of hard money lending to a level of seeking repeat customers as the mainstay of growth. Private money is more of a mainstream tool for sophisticated borrowers seeking real estate profits in dynamic market conditions. Hard money is more of a tool of last resort.
Private money lenders are typically more flexible in revisiting terms post-closing, and willing to consider requests for additional funding if the collateral has been improved or a little more time is needed. Again, private money lenders want the deal to work. Hard money lenders on the other hand, typically see post-closing adjustments as an opportunity to profit and generally only make adjustments upon gaining heavy concessions. Many hard money lenders have no problem with bruised relationships because their business model does not contemplate repeat business. As harsh as that may sound, it’s an attribute of hard money lending that borrowers should be aware of so they are not surprised on adjustment day. 🙂
Hard money lenders are more flexible with property type and location than private money lenders (typically speaking). If your request is in a remote tertiary location, hard money lenders are more likely to accommodate the request. Private money lenders are typically looking for locations that are more resilient to down turns in the economy. Hard money lenders are often times less concerned if they feel loan to value is low enough to compensate. The same can be said for property type. Private lenders have a penchant for property types with high market demand and are less likely to loan on raw land, a bowling alley, churches or other single use structures, unless the land value is so strong it supports the loan by itself (think church on Santa Monica Blvd).
Nevertheless, things aren’t ever black and white. Private money lenders and hard money lenders do have some aspects that are the same, mainly in what sets them apart from the requirements of traditional banks.
Similarities:
- Speed
- Simplicity
- Creativity
Both private and hard money lenders are normally swifter than a traditional banks in getting capital to the borrower. When there is simply no time to waste, these two types of lenders deliver the cash quick.
Both parties are also probably going to be more pragmatic, giving straight answers and cutting to the chase because time is of the essence. Fundamentally, both private money lenders and hard money lenders are not regulated by the banking commission. This avails greater flexibility, and less hoops to jump through than what is typically imposed by traditional banks.
When a special loan design is advantageous, both private and hard money lenders have the advantage over traditional lending sources. Loans with prepaid interest, partial payment designs or negative amortizations designed to keep the payments down are standard options when dealing with fund based private lenders and most hard money lenders. If a borrower needs a little payment creativity for a period of time while they re-lease or reposition the property, private and hard money lenders can be a terrific option.
Seattle Funding Group – Private Money Lender Engineered for Speed
At Seattle Funding Group we consider ourselves a private money lender. Our attitude is pragmatic and swift. We do pause to make sure our borrower’s desired outcome is within reasonable reach, but our terms are softer than traditional hard money. We’ve been called the “A paper” of hard money, and our lower pricing reflects it. We realize there are a lot of options out there when sourcing your capital. There are plenty of good reasons to choose a traditional lender over a private or hard money lender, especially if time and deal certainty is of less concern. Receiving a traditional bank loan however, is not always so easy. When the clock is ticking and you need to close, can you afford to wait around for months?
How can we help you today, so you profit tomorrow?
