Private money lending is commonly known as hard money lending. Private money lending involves private individuals lending their investment capital to borrowers while securing their loan with a deed of trust recorded against the borrowers’ property.
Private money lending is a “niche” market for borrowers and properties that do not meet typical institutional lending requirements. Private money loans make up approximately 15% of all real estate loans originated in the U.S. each year. This niche will continue to grow as institutional lenders tighten their lending requirements. Private money lending provides borrowers an opportunity to secure financing from private individuals when they do not qualify for institutional financing. There are 4 primary reasons borrowers seek private money financing, they are timing, property type, situation & borrower issues. Any one of these reasons can cause an institutional lender to disqualify a loan. To learn more about these four reasons, read this article: Why People Borrow Hard Money Loans.
There have been many legislative changes in the private money lending industry effecting both borrowers and investors. Most of the changes have been made to protect the borrowers from predatory lenders and to protect investors from brokers dealing in fraud.
Private money lending is based on direct lending on individual deeds of trust. These loans are not derivative securities and are not sub-prime loans. Sub-prime loans were poorly underwritten to 100% loan to value with no real recourse should the borrower default. Private money lending is primarily collateral driven with low loan to value ratios so there is plenty of protective equity should the borrower default. Private money loans are generally short term, with the average duration of loans under 4 year terms and typically offer favorable returns to investors who make these types of loans.
James Perry is President of Alliance Portfolio Private Equity Finance. For over a decade, Alliance Portfolio has been Southern California's direct hard money lending authority, specializing in custom coastal loans for residential, commercial and mixed use properties. He can be reached at jperry@allianceportfolio.com. For more information, go to www.allianceportfolio.com. |
