I'd like to discuss some myths about private money lending. Over the years, I have heard many misconceptions about hard money/private money lending. For the sake of time it was a challenge for me to narrow my list, but I managed to whittle it down to my top five. Here you go:
Private Money Lending Myth # 1: No Private Money Lender can fund in less than a week.
Fact: We can and do fund Private Money Loans in less than a week. However, we find that we are most successful funding in a short time frame when we have the broker/borrower’s full support and cooperation. It is also necessary that both be very organized and diligent in providing us the documents in a timely manner. Our standard time frame is typically two weeks, however, we can and do fund sooner.
Private Money Lending Myth #2: Most Borrowers seeking private money loans are desperate, and turn to private money loans as a last option.
Fact: Most hard money borrowers are solid, successful individuals or businesses that are in a situation, or are presented with an opportunity, that does not fit easily into the rigid structure of institutional lending. They may be self-employed individuals, businesses without a lengthy track record, or borrowers without a flawless credit history that are having a difficult time obtaining institutional loans. They turn to the hard money option because private money lenders can move quickly and are flexible in structuring transactions. A hard money lender looks primarily to the collateral as the ultimate source of repayment as well as the borrower's capacity, as indicated by their income relative to their expenses, or willingness of the borrower to repay the loan as reflected in their credit record. Bottom line, Private Money Lenders are more flexible. When we make a loan, we roll up our sleeves and get involved. We meet the borrower and look at the property and speak to various parties to determine if the loan makes sense from a security point of view. And always keep in mind that our primary-though not our only-criteria is equity. We are an equity lender. If the equity is there, other shortcomings are taken into account when looking at the big picture.
Private Money Lending Myth #3: Private Money Lenders are a bunch of dishonest loan sharks.
Fact: Most principals in hard money lending organizations are successful businesspeople with backgrounds in law, accounting, banking, real estate development or real estate investment. They provide a needed service, especially in today's economic environment. Most are lending their own money and/or money entrusted to them by other investors or close business associates. Private Money Lenders are in the business to make secure loans and provide their investors the best possible ROI. Referrals are the life blood of the business. Most private lenders are small organizations with a limited marketing budget, and a bad reputation is counterproductive to that effort. While there are unscrupulous people in the private money lending business, as in any business, do your homework before choosing your private money lender and you will be able to sort the good from the bad.
Private Money Myth #4: Private Money is too expensive.
Fact: Private money is more expensive but is only one factor when assessing your lending options. It will cost more than that advertised by institutional traditional lenders, i.e. a bank, but is priced according to the law of supply and demand. For some, bank financing may not be an option. A quick funding date may be impossible for a bank to meet. A borrower needs to explore all avenues and select the option that best fits his/her requirements. Additionally, private money is not too expensive if a borrower can use the funds to take advantage of a deeply-discounted purchase price for a fast close or to buy out a partner who needs quick cash. The key for any borrower/investor is to focus on the complete loan scenario. The cost of borrowed capital is only one of many factors to consider.
Hard Money Myth #5: Private Money Lenders make risky loans.
Fact: While the collective wisdom, even among real estate and mortgage professionals, is that hard money lenders make risky loans, our experience is that the opposite is true. Because such lenders are typically lending their own money (as opposed to a bank employee lending someone else's money), they are particularly risk averse. Unless a private money lender really understands how to value the collateral against which he is lending and understands the prevailing market, he will likely not make the loan, regardless of the strength of the borrower or the LTV. On the other hand, with understanding comes knowledge, and a private money lender may make a loan that others consider risky because he simply has better information.