What is the difference between a private lender and a hard money lender?
To me there is little difference, and the terms are interchangeable. Hard money lenders are private parties, generally individuals or small groups of people, as opposed to a public entities like a banks, credit unions, life insurance companies, etc. In other words, they are private lenders making loans with private money. The national organization to which many reputable hard money lenders belong, Forrest Financial Group included, is called the American Association of Private Lenders, not American Association of Hard Money Lenders.
Then how/why do people sometimes make a distinction between private lenders and hard money lenders? First, some believe that if you borrow money from someone who is not actively engaged in lending money then you are borrowing from a private lender, not a "professional" hard money lender. Following this line of thinking, Aunt Agnes or Cousin Claude would be a private lender; Forrest Financial would not. Second, some make the distinction based upon the cost of the money. The assumption being that private lenders charge less than hard money lenders. Aunt Agnes may well make a loan to a family member at a rate lower than that from Forrest Financial Group. Is Aunt Agnes making a private loan? Sure. But in my mind, she is also making a hard money loan. Regardless of what you call a lender, it is important to know who you are borrowing from and to structure the loan so that both parties comfortable and fully understand the terms and conditions. Taking advantage of Aunt Agnes because she is naive when it comes to real estate and financial matters could be a big mistake. Something could go wrong, or there may be a just simple misunderstanding down the line. Either way, sitting down with an unhappy Aunt Agnes at Thanksgiving might not feel good.
From Seeking Alpha by Don Dion
October 2, 2013 - 9:05am
TWO GREAT NAMES IN AMERICAN INVESTING
The name Goldman Sachs (GS) has been one of the premiere names in investment banking in America since the 1800s. However, its sterling reputation did not prevent the company from being involved in the sub-prime mortgage crisis that threatened to sink the global economy. Goldman was bailed out by the U.S. taxpayers and Warren Buffett, founder of investment firm Berkshire Hathaway (BRK.A, BRK.B). These two great names in American investing came together at a critical time in history to produce a partnership that helped to stabilize one and enrich the other.
The origins of Goldman's problems began in 2006 and 2007 when the credit default swap frenzy created the meltdown in the American housing market. Questions about the company misleading homeowners and setting up the conditions to allow mortgages to fail swirled through the financial industry. Top executives and shareholders began to sell off their stock dropping prices to historic levels. Trouble spread to the company's dealing in the United Kingdom as well, and it became clear that the company was teetering on the brink of collapse.
WARREN BUFFETT TAKES AN INTEREST
In the midst of the financial maelstrom of 2008, Goldman Sachs was in the eye of the storm with a variety of fiscal woes that caused them to teeter on the edge. Warren Buffett stepped in as the ultimate hard money lender to offer the company a $5 billion dollar loan at 10 percent interest plus kickers to get the company back on steady footing. This money helped Goldman to restore stability to its accounts and reputation. It could be argued that the confidence that Buffett showed in the company also played a part in helping it to weather its fiscal storms. Goldman repaid the loan in 2011, leaving other conditions in place until a later period.
A bridge loan is a short-term loans used to quickly close on a property, retrieve real estate from foreclosure, or take advantage of a price discount. The "bridge" buys the borrower sufficient time to arrange traditional long-term financing, improve/re-position a property for re-sale or close on the sale of another piece of property. A bridge loan is typically paid back when the collateral for the loan is sold or refinanced with a traditional lender, Most hard money loans could be called bridge loans in that their terms are usually of short duration and will be re-paid via re-sale or re-financing. A bridge loan does not have to be a hard money loan, however. While banks and other traditional lenders can, and do, make bridge loans, a borrower will often turn to a hard money lender for a bridge loan because a hard money lender can move more quickly and will typically require less documentation. Because the loan will be outstanding for only a short period of time, the cost of the money may not be material when looking at the transaction as a whole. The money saved by quickly taking advantage of an opportunity often more than offsets the cost of the loan needed to take advantage of that opportunity.
For a cash-out refinance, a hard money lender may be the answer.
Recently, we were able to help a borrower who found himself in this exact situation. He owned a free and clear, fully-leased commercial property and approached a local bank to make him a $500,000 loan, equal to about one third of the property's value. Borrower had a good financial statement and a good credit score. Because the loan would be a cash-out refinance, the bank said no but offered a solution for the borrower. The loan officer told the borrower to go get a hard money loan for $500,000, let the loan season for a few months and then come back to the bank. The bank would then have no problem refinancing the $500,000 hard money loan at a lower rate because the bank's loan would not be a cash-out refinance. Twisted thinking on the bank's part since the end result is the same. The borrower ends up with $500,000 in cash-out loan from the bank. The borrower just has to jump through a couple hoops to get it accomplished.
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