Canceling “Hard Money”

Hard Money, Private Money, and Bridge are the most common terms used to describe non-bank loans secured by investment real estate. All of these terms mean the same thing in the professional private mortgage lending industry, but there is now a big effort being made to cancel the term Hard Money. In this guide, I’ll explain who is canceling hard money, the reasons for this initiative, and why it matters to everyone involved in private mortgage transactions.

For as long as I’ve been in this industry, there has always been a terminology dilemma between the terms hard money and private money. Many real estate investors feel that a private money lender is an individual investor lending out their own retirement funds, but doesn’t charge any fees and typically offers 100% financing.

Those same real estate investors feel a hard money lender is a company that charges fees and higher interest rates than individuals, while being more conservative on the loan-to-value ratio. So the difference is really whether they’re borrowing from an individual versus a company.

Since the term hard money is more popular among the real estate investor community, many lending companies use it to describe themselves and include it in advertising to attract new business.

What’s wrong with the term hard money?

First, it just sounds rough and unprofessional. Aside from the real estate investors that use private lending for their investments, many people in the general public associate the term with lenders who take advantage of property owners by charging extremely high interest rates, exorbitant fees, hidden charges, and unethical business practices.

The reality is that the companies you may refer to as hard money lenders, are part of a very competitive, professional and regulated industry that plays a vital role to help real estate investors close more deals, which in turn improves neighborhoods throughout the United States.

Who is canceling hard money?

There are four trade associations which promote education and best practices among the private mortgage lender community.

• California Mortgage Association (CMA)
• Arizona Private Lender Association (APLA)
• American Association of Private Lenders (AAPL)
• National Private Lenders Association (NPLA)

California and Arizona have lots of mortgage regulations and require private loan originators to be licensed, so it makes sense that these 2 states have a trade association for private lending. The AAPL and the NPLA are the organizations spearheading the effort to cancel hard money. Both are trying to convince their members to stop calling themselves “hard money” lenders. In fact, the NPLA passed a resolution in March 2022 which encourages all those associated with Private Lending to cease using the term “hard money” and use alternative terms instead:

• Private Lending
• Bridge Lending
• Transactional Funding

The largest players in our industry are members of these associations, and most are very supportive of this initiative.

Reasons for ending the use of “hard money”

There are two reasons for the effort to cancel the term hard money. The first reason is regulations. At both the state and federal level, the trade associations that fight the passing of new laws affecting our industry are finding that lawmakers are sensitive to the term “hard money” and associate it with lenders of last resort including, payday lenders, check advance, and pawn shops.

Private lending advocate constantly try to educate lawmakers of the evolution of our industry, how the majority of lenders in our space are professional and ethical. It doesn’t help the cause when many lenders continue to refer to themselves as hard money lenders.

The second reason for canceling hard money is capital markets. Private mortgage lending has historically been capitalized by individual private investors who provide the funds at closing, purchase the loans after funding, or invest in a mortgage fund. However, the majority of private mortgages in the United States today are made possible by institutional capital, which consists of hedge funds, private equity firms and other Wall Street-backed companies. Private mortgages now have a secondary market similar to consumer home loans, and this is the primary reason why private mortgage interest rates have decreased significantly over the past 7 years. Here’s how it works:

1. Lender funds the loan using their own balance sheet
2. Lender sells loan to an aggregator (AKA trader), allowing them to recapitalize and fund more loans
3. The aggregators purchase hundreds of loans from multiple lenders to create a mixed pool of mortgage notes
4. Pools are securitized and sold to the public capital markets or insurance companies

Some of the potential end buyers of the pools of loans are aware that the loans are commonly known as “hard money” and don’t want to be associated with it. The loan traders have their own set of terminology to describe private mortgages (business purpose loans, residential transitional loans, etc.), but having hard money floating around in our industry is causing some pain for them.

The origin of canceling “hard money”

The initiative to end hard money was started by John Beacham, the CEO of Toorak Capital Partners – one of the largest aggregators in our industry. Beacham first voiced his thoughts about canceling hard money at private lending conferences in 2021, and then eventually convinced the 2 national private lending trade associations to address it with their members.

Beacham was the author of the resolution “Encouraging the End of the Term Hard Money” which was passed by the National Private Lenders Association at the annual members meeting in March 2022. As a result, some of the largest private mortgage lenders in the country have already eliminated the term “hard money” from their websites and other marketing materials.

Obviously, it’s not possible to prevent lenders from using the term hard money. I know lots of lenders that embrace the term and don’t care about the challenges with regulators because they lend in a state that is very business-friendly. Other lenders don’t care about the challenges faced by aggregators because they don’t use institutional capital. However, the idea is that if the majority of professional private lending companies stop using the term “hard money,” it will become less popular over time. It could take several years before this happens.

Conclusion

So why does all this matter, and how does it affect property investors, brokers and others in the investment real estate space? The terminology disconnect could result in missed opportunities when you’re trying to connect with the right lender. The perfect example of this is when you search online for lenders. A search for “hard money” may eliminate a lot of good quality lenders that offer a similar loan solution as the lenders that show up in the search results but choose not to use the term hard money. You could search for “private lenders” instead, but both terms are quite broad and cover a variety of different loan types.

To solve this issue, I recommend searching by the loan type and the property’s state or metro area. Some private or hard money lenders only offer certain loan types, so it’s extremely important to include the deal type. Some examples are:

• Purhcase Bridge
• Refinance Bridge
• Rehab
• Fix and Flip
• Ground-up Construction
• Long-Term Rental (DSCR)
• Value-Add

The state or metro area is equally important since many lenders focus on select regions. Adding the property type could also be helpful since some lenders only focus on commercial real estate versus residential investment properties.