If you were to attempt to write a complete guide covering every detail of hard money lending, you would find it exceedingly difficult to establish a black-and-white model on which nearly every hard money lender operates. Why? Because hard money lending is highly fragmented. That is a good thing, by the way. Fragmentation is one of the things that gives individual lenders so much flexibility.
There are both pros and cons to fragmentation. In most industries, fragmentation is seen as less efficient and ultimately more costly. In light of that, the common thinking is that consolidation is better for consumers because it makes products and services cheaper and easier to obtain. That is not necessarily true across the board. It is certainly not true in hard money lending.
Hard Money Is Private Money
What must be understood is that hard money lenders are private lenders. The money they lend is private money. So unlike banks and credit unions, hard money lenders do not lend out customer deposits. They also don’t offer a litany of retail banking services including safe-deposit boxes, notary services, etc.
Most importantly, hard money lenders obtain their funds in a number of different ways. This is where fragmentation comes in. Because different lenders do business in different ways, it really becomes difficult to consolidate. Any attempt to do so would water down the highly flexible nature of the industry.
Different Funding Sources
Actium Partners is a Salt Lake City, Utah hard money firm that specializes in real estate transactions. They explain that hard money operations can be funded in a number of ways. For example, a group of high-net-worth individuals might get together and form a hard money firm as a way to further diversify their investments.
Other funding possibilities include:
- real estate investment funds
- fix and flip funds (mortgage funds)
- multi-generation family contributions
- large real estate firms
- existing real estate portfolios.
A good example of hard money’s flexibility is found in the multi-generation family model. Under this model, you might have multiple generations of the same family with real estate holdings. Their properties are not generating the kind of return they want, so they leverage the equity in some of those properties to create a hard money fund.
Different Hard Money Specialties
In addition to multiple options for funding and structuring a hard money firm, there are substantial differences in terms of specialties. Again, Actium Partners specializes in real estate transactions. They do other types of loans, but commercial and investment properties are truly their niche. They don’t do fix and flip loans.
Other hard money lenders do specialize in the fix and flip market. They fund investors who buy residential properties, rehab them, and then either sell them or put them on the rental market. Fix and flip funding is a bit more risky, but there are plenty of hard money firms that make it work.
There are other firms that specialize in funding corporate mergers and acquisitions. These types of deals require a tremendous amount of cash, so they are reserved for the largest firms with the deepest pockets. Often times, these hard money lenders are funded by a large number of contributing investors.
Maintaining Freedom and Flexibility
Fragmentation may not be ideal in some industries, but it is part of what makes hard money lending so unique. It allows the industry to maintain a high degree of freedom and flexibility that is not available in the traditional banking market. Any attempt to consolidate would have a detrimental impact on hard money. In short, fragmentation is good.