Business & Finance Investing & Financial Markets

Private Hard Money Lenders – Is this your best choice?

Today, I would like to discuss the major difference between institutional and private hard money lenders. Let's start with the definitions. The concept of an institution is a bank or a credit union or some types of institution that is actually doing funding. Whereas, private basically means that it is a group of individuals or it's a fund that has been put together or it's a private corporation.

It's not something that's going to get secondary financing, which means that they are not able to get additional money from a government or a federal reserve. However, institutions are able to access federal funds and are actually able to leverage money by using the feds and depository accounts.

In the real estate investment business, there are basically two different types of lenders:
1. Institutional hard money lenders
2. Private hard money lenders

Institutional hard money lenders are the places that are actually getting financing from other sources or a bank basically. They are some type of a pseudo bank and one of the reasons that are really important is that there are some hard money lenders that are more institutional and they come from the lending world and they understand what lenders talk about. They understand depth ratios, qualifications and those types of stuff.

The failure for most of the institutional hard money is that they don't think like a real estate investor, which ultimately causes a problem for you because you have a bank on one side and your needs as a real estate investor on the other. Sometimes that gap is really big and it's a long way to cross it. That's one of the problems that you are going to have with most of the institutional hard money lenders.

Some of the private hard money lenders are going to be real estate investors and some of them are going to be just private individuals or companies or it could be a fund that has been put together. It could be any type of other thing but the concept is that they are able to make their own decisions.

They are not regulated by some regular regulatory body. They are able to understand and know what they want to do personally, when it comes to funding. Private money lenders are the best people as far as funding is concerned because they are going to fund on good deals and that's the bottom line.

If you have a deal, which is really a good deal, you're going to be able to find someone that's going to loan to you on that. If you've got a garbage deal, you are not going to find somebody who's going to loan on it.

I am always amazed by people who are trying to bring in crap that's just not worth funding on to hard money lender. When I say crap, what I am talking about is deals that don't have profit in them or deals that don't have any margin in them. If you buy a property for 120, that's only worth a 100. Then, it's obvious that you are not buying a good deal and secondly, you probably don't understand why you are not buying a good deal, which is the worst problem then thinking it's a good deal.

It's really important to have your hard money lender think like an investor, rather than thinking like a banker. There are lots of bankers that are trying to do hard money but the important thing is to have someone who actually thinks like a real estate investor.

Someone who can help you evaluate the deal. Somebody who can help you understands why you are buying a good deal or why you are not buying a good deal. Someone that understands the importance of the different things you are getting done. The importance of having monetary repairs done. The importance of reselling that property. The importance of understanding your exit strategy and someone that understands the common sense.

One of the hard things you'll have with most institutions is that they are trying to fit everything in a perfect box and if it doesn't fit in that box, it's never going to get funded. That's going to be really difficult because most deals that real estate investors are doing, don't fit into that perfect box. They are not able to fit into the actual criteria that you or institutions may be looking for.

Whereas, a private hard money lender is going to use their own funds. They are not going to sell the paper. They are not going to do what is called recapitalizing, where they actually get rid of the paper. So, they put a loan together, sell that loan to another party and then they get their money back.

At the end of a day, any of these hard money lenders are typically looking to make a return on their money. So, they like the idea of real estate. They like the idea of some security but with that, they want to make sure that they are actually getting return on their money and that's really when it comes down to hard money lenders.
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