Words have power. We use them to define our place in the world and to communicate that position to others. Recently, one phrase long used in our industry has come under fire: hard money.

What is a hard money lender? Is it the same as a private lender? An asset-based lender? Non-agency? Balance sheet lender? Non-conventional lender?

Talk to industry professionals, and you’ll come away with more opinions—and conflicting definitions—than there are people at the table.

Why Does It Matter?

Our industry is at a crossroads: Main Street borrowers one direction, Wall Street capital in another, and Uncle Sam increasingly on patrol. Each has their own vernacular for finding our address, and when “hard money” appears alongside “private lending” in the search results, for some, it’s a mental dead end.

“Hard money lenders” originally determined creditworthiness based strictly on collateral—in this case, the tangible “hard” asset of real estate. “Soft” criteria such as borrower experience, exit strategy, credit history, and other considerations weren’t factors. With less due diligence, hard money lenders could close loans quickly, and borrowers were willing to pay a premium for that fast close and light underwriting.

In today’s more information-rich world—and a world still riding the aftermath of the Great Recession and housing market crash—true “hard money loans” are hard to find. The recession taught us that underwriting both the borrower and the asset is crucial to our own and our borrowers’ success. And the advent of sophisticated origination, underwriting, and servicing tools enabled lenders to keep up with timelines while adding more steps to due diligence.

A New Term for Today’s Profession

Few know that the American Association of Private Lenders was for a brief period in 2009 (the same year it was established) called the National Hard Money Association. The small caucus that gathered at our inaugural annual conference shared ideas to bring the profession into the mainstream and safeguard its position in the larger finance market.

Perhaps the most crucial idea to come out of that conference was the need for a new term to define their vision for the industry and its future: not “hard money” and “hard money lenders” but “private money” and “private lenders.” With that, we became the American Association of Private Lenders—and we began spreading the word.

Back to the Crossroads

To Capitol Hill, “hard money” hasn’t evolved from its origins. Conversely, the industry’s real estate investor borrowers want to work with private lenders as they practice today, but still find those lenders by searching for “hard money.”

Although having two different languages to talk with wildly different audiences may seem immaterial, the reality is that it’s impossible to keep groups siloed—and legislators have increasingly expressed sensitivity to this terminology.

As an example, nearly every battle AAPL has fought to prevent the increasing regulation of our industry is because legislators see continued use of the “hard money” descriptor and don’t understand that it has evolved. We’ve met with success at each turn thanks to our ability to reeducate policymakers on who we are, what we do, and why it matters.

On the Wall Street front, do we think “hard money” terminology will cause their exodus from the industry? Absolutely not. Currently, while they may have personal perceptions about it, for the most part, our contacts within the sector tell us they simply relabel the loans in their investor reporting. The goal here is to raise perception and provide all parties with a single set of terms that accurately define our profession and the loans transacted.

Consensus, But No Quick Solution

AAPL has been running the long game to minimize use of the “hard money” terminology since 2009. Beyond promoting our “private lender” replacement, by intention “hard money” and its derivatives haven’t appeared in this publication for years (except under very specific editorial exceptions—this being one). As the industry has acclimated to the new term, stakeholders have become more vocal in their distaste for its predecessor.

But.

Borrowers still search “hard money” to find private lenders. We’ve had reports from some lenders that eliminating the phrase from their sites led to less traffic and fewer leads. And Google Ads still ranks “hard money” and its iterations as earning more clicks and impressions, although there’s no data on the quality of those leads compared to borrowers searching for “private lenders” and related keywords.

As much as our industry and practicing professionals may acknowledge the phrase’s reputation, borrowers and their needs are what keep lenders open for business.

The Direction Ahead

Our position has not changed since 2009: We have a duty of care to all our members and the industry itself. We set a path then to safeguard and support our members’ businesses. Although we recognize “hard money” is not recognized positively in some circles, we need to work toward a solution that allows people to continue to fulfill the needs of their business.

To that end, the solution is to educate borrowers on what these terms mean and what terminology to use to find the type of loan and partnership they are looking for. This is not a change we can force, because it will leave too many lost connections and missed opportunities on the table. Just as we have nurtured use of “private lender” in our own industry, so too must we partner with others to nurture it among real estate investors.

Thankfully, this is an endeavor that is already in the works. As many of you know, AAPL’s sister company is Think Realty—an education platform for real estate investors with a 20,000+-strong membership and an even wider network with hundreds of connections to local REIAs. Moving forward, Think Realty will be duplicating our editorial guidelines on the use of “hard money” across their media platform. They will also be publishing educational content on terminology and explain how knowing what words to use will help real estate investors find funding and lending partners efficiently. We will also be working with our wider network to organically feed the movement by providing resources and promoting candid discussion.

What You Can Do

As a matter of course, many of you already educate your borrowers on how your loan programs work and how you differ from conventional mortgage lenders. We encourage you to also include information about the different kinds of private lenders within our industry. Setting expectations and equipping prospects with this knowledge both benefits the borrower and fosters their trust in you. It also serves the good of our industry.

Finally, from the many conversations we’ve had with our members and other industry stakeholders on this topic, we’ve found a common desire for ways to differentiate the types of lenders in our space. “Private lender” is an all-encompassing term but can lack nuance. Please tell us what terminology your borrowers have responded well to as you explain the:

• Source of your lending capital, whether that be the capital markets, syndication, and/or your own balance sheet.
• Size and scope of your lending business, such as if you are lending from a retirement account a few times a year, a local lender closing a few loans per month, or a large regional or national outfit extending hundreds or thousands of loans per year.
• Level of due diligence and your matrix of “hard” and “soft” underwriting considerations.

Are there other ways you seek to find differentiation within the industry? Let us know!

Finally, Some Definitions

Underpinning the concept of minimizing the use of “hard money” in our industry is a recurring theme of standardization—that the root of the issue is too many interpretations of what the same terms mean.

We offer up the following definitions for discussion, debate, fine-tuning, and eventual consensus [last updated 5/9/2022]:

Private lender: Any non-depository individual or entity that primarily originates business-purpose loans secured by hard assets, generally real estate.

Hard money lender: A subset of private lender where creditworthiness is determined solely by the securing real estate collateral.

Correspondent lender: A subset of private lender where the closed loan is sold to investors.

Portfolio lender: A subset of private lender where the closed loan remains in the lender’s portfolio.

Fund manager: A subset of private lender where, depending on the fund structure, the deployed capital is sourced by offering exempted securities to accredited and occasionally non-accredited private investors.

Private investor: An individual or entity that seeks a return by deploying capital through a private lender or fund; the investor may or may not be named on the loan’s promissory note.

Private money broker: Any individual or entity that acts as an intermediary between a borrower and a private lender without directly originating the loan.