Clearly, it’s an unprecedented opportunity for private lenders to further disintermediate the investment banks and entrench themselves as an alternative option for larger transactions now, as the bond and loan markets are still in recovery. The key advantage for private lenders in the current crisis is to provide much-needed certainty to borrowers.

COVID-19 is acting as an accelerant for private lending growth. One of the great attributes of this market is that private lenders offer certainty in terms and financing is much less contingent on the credit ratings. Add to this the fact that fundraising in the private lending markets has been booming over the last few years, and you have the perfect storm for a private lending boom. When private lenders are able to raise larger funds, it naturally follows that they are now able to provide a larger amount of capital for larger borrowers.

The Rules of Thumb blog from MoneyThumb is quite sure private lenders are not glad that Covid-19 came along since it is actually providing unexpected opportunities for them, but there is nothing wrong with finding a silver lining in any cloud. We have many upstanding private lenders who use our PDF financial file converters specifically designed for their use, and we are sure they would be the first to tell you that they are just as concerned about the coronavirus as the next person. However, when opportunity knocks, we all open the door.

To understand private lending better and see what experts predict for the future of private lending, we'd like to suggest that brokers, borrowers, and lenders attend this free live and interactive webinar on Friday, July 31, 2020. The webcast is titled Private Lending 101: What You Need to Know and is provided by The Adviser. Below is a description of what will be discussed in the webinar:

The post Covid-19 Causes Jitters In Traditional Lending Markets, Opens Doors for Private Lenders appeared first on MoneyThumb.

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:

Philosophy

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.

Agenda

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.

Flexibility Post-Closing

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!

The post Private Money Lending vs Hard Money Lending: What's the Difference? appeared first on MoneyThumb.

There are red flags to be on the lookout for and we have listed the main ones below:

Red flags:

1. No license in states where licenses are required.
2. English is off a little.
3. They reach out to you. Very few—if any—lenders solicit for business in this manner. (Ninety-nine percent of the time, the borrower makes the first contact with a legitimate lender.)
4. Basic website with no real information and no mention of the actual principles.
5. Again, terms that are too good to be true. (Once you realize there is NO 5 percent money, you should just move on.)
6. Too quick to approve you and your deal with minimal information. (Remember, their goal is speed—getting some money out of you as quickly as possible.
7. Any lender that says they make loans for $20K to $20 million, this simply is not real. (They do this to catch all the fish in the sea.)

We found this list of red flags in an article at Bigger Pockets, written by Jay Hinrichs. The MoneyThumb team is confident in the opinions of Mr. Hinrichs since he knows of what he speaks. Jay started his hard money lending career in the latter half of the 1980s and was president of Langer Mortgage in Oakland, Calif., with a $50 million book and 250 investors. This company-matched investors to loans and fractionalized loans were the norm. The company was sold in 1992 to a larger firm. In 2002, Jay started another hard money lending company in Oregon—this time using bank wholesale lines for their fundings and internal cash. He grew that company to $30 million.

Jay Hinrichs also talks about the origins of hard money lending and how to spot legitimate hard money lenders when you are seeking a private loan. Jay says that there are "very large hard money lenders, plus a large amount of smaller, local companies that have entered the business. In addition to that, today we’re living in an age of mass information. 

There is also an illusion that there is a difference between a private money lender and a hard money lender. Many smaller hard money lenders rebranded as private money lenders to feed into the illusion that their rates would be lower. (And we are all looking for lower rates, right?)"

So, anyone who advertises is a hard money lender, even if they call themselves a private money lender. A true private money lender is one that you meet at an REIA. They are not in the business of loaning money and will usually use their IRA or solo 401(k) to make a few loans a year.

Where do hard/private money lending companies get the money to lend to the end borrower?

1. They will broker loans to investors one-off.
2. They create a PPM and pay investors a rate of return.
3. They can get a facility from a bank as a wholesale line and then re-lend those funds. (This is how I ran my company.)
4. They can crowdfund, raising investor capital to put into loans.

Mr. Hinrichs has no sympathy for shady, illegitimate lenders of any kind. In the Bigger Pockets article, he calls them "pump and dump," lenders. He warns readers in the article that targets of these people posing as lenders are generally anyone on social media who mentions needing or wanting a loan. They hide behind their computers, usually have a very basic website, and talk a great game. The lead-in is very low rates—right now, most like to quote 5 percent! Jay Hinrichs states, "There is no 5 percent, hard money lender, in the country."

He goes on to say, "So, what these predators do is engage in an easy banter—talk enough about the business to give you the illusion they are lenders that can perform. However, as the transaction progresses, they then will ask for some sort of good faith deposit or money upfront to draw the docs, etc.

Once they have hooked their victim and collected the first deposit, they keep coming back for more. One expense is pitched as the so-called insurance premium. Since they are loaning you money at 5 percent with nothing down, you must take out this insurance to protect them."

Please understand that this is a fraud. There is no insurance for hard money loans or private money loans. It’s a made-up fee. ­­­­­­­­Some of these predators are very good at what they do and will get thousands out of a client before finally going dark and never funding.

We appreciate the information Jay Hinrichs shares about what to watch out for when seeking a private loan, and we know our readers do too. We'd love it if you shared this blog post from MoneyThumb so that your peers can also be forewarned about fake lenders and how to quickly spot the differences between the good guys and the bad guys.

The post How To Know If a Hard Money Lender is Legitimate appeared first on MoneyThumb.

Private lenders tend to have faster approval times than banks or credit unions, thanks to streamlined or informal application processes. Many private lenders the PDF financial file converters from MoneyThumb to help speed up the loan approval process. Private lenders may also be more willing to work with people who have bad credit. Many online private lenders have minimum credit score requirements in the bad credit range. And individuals who are private lenders are often not too much concerned with credit scores.

How Private Lenders Work

Loans from private lenders work just like loans from banks or credit unions. You receive funding to buy a property, make a purchase, consolidate debt, make home improvements or any number of other expenses. Then, you pay the amount you borrowed back in installments, with interest. That’s how the lender makes money.

Private Lending Companies

The first major type of private lender is a private lending company. Just like banks, these companies look to profit off of the interest you pay them. When it comes to personal loans, companies referred to as “online lenders” are private lenders that conduct all of their business over the internet.

Some notable private lenders include:

• LightStream
• Best Egg
• LendingPoint
• FreedomPlus
• Avant
• LendingClub
• Payoff
• Prosper

Individual Private Lenders

The second big type of private lender is an individual. Individual private lenders can be investors who are looking to earn money through the interest borrowers pay on loans. This may get them a better return than leaving their money in the bank would. Individual private lenders can also just be people the borrower knows who is willing to help out with funding and may not be as keen to make a profit.

Are Private Lenders Legal?

It’s perfectly legal for organizations other than banks and credit unions to lend money. However, private lenders still have to comply with the usury laws and banking laws of the states in which they operate. In other words, the rates that they’re able to charge are regulated. Plus, depending on the state, a private lender might only be able to lend a certain amount without having a banking license.

What is the Difference Between Private Lenders and Hard Money Lenders?

“Private money” generally refers to funding provided by a family member, friend, business partner, or other acquaintance. In short, a private money loan comes from a source that isn’t typically in the business of providing loans. Given the relationship between the lender and the borrower, a private money loan may mean more flexible terms and a lower interest rate than an equivalent hard money loan.

Meanwhile, “hard money” – whose name refers to the “hard” assets underlying the loan, such as real estate – generally refers to funding provided by non-institutional lending companies with, usually, set and defined lending criteria. Hard money lenders are in the business of lending money and in far greater supply for the typical real estate borrower.

In essence, a hard money lender is a private investor who offers rapid loans with property used as collateral. In other words, a hard money lender does not finance loans with money from deposits, as banks and other financial institutions do.

Instead, a hard money lender is an individual or group that uses private money to quickly finance loans. Because hard money lenders use private funds, you can bypass much of the regulatory hurdles that are part of the conventional loan application process.

To give you an idea of the structure of hard money loans, typical terms might include a 5 percent origination fee and a 13 percent interest rate on a loan. These interest rates have more to do with the local loan market than they do with your specific credit score and financial history.

Because a lender has access to such a valuable asset as collateral, it can insulate itself from a lot of risk in the event that you default on your payments.

On average, you will receive the funds from your hard money loan within just a couple of weeks of your initial application. It’s this quick funding process and the bypass of strenuous loan applications that make hard money so appealing to so many different people.

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