As the provider of the best selling PDF financial file converters on the market, MoneyThumb has many customers who are private lenders as well as hard money lenders. But what is the difference between the two? Today on the Rules of Thumb blog we will provide a solid answer for our readers. We have pointed out the definitions of both private money lenders and hard money lenders below:
Private money lender: a lender who lends based on great care to borrower background, quality of securing a 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.
So now that we have discerned what each type of lender means, what are the major differences between the two?
Differences and Distinctions:
For the most part, hard money lenders focus solely on 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.
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.
The Rules of Thumb blog from MoneyThumb hopes this post has cleared up any confusion our readers may have had about the differences between hard money lenders and private money lenders. We would love it if you shared this post on your social media page so that your peers can benefit from the information. And speaking of social media, we would appreciate it if you followed us on Facebook and/or Twitter. Have a great day!