The Little Lender That Could – How Small, Independent PML Shine

This week we attended the American Association of Private Lenders annual conference in Las Vegas, our 4th time over the years. It has been a great way to make new connections with others in the industry and receive timely updates and industry trends. The exhibition hall is a phenomenal way to access tons of resources and vendors able to assist any private lender – big or small – with solving current business challenges specific to private lending. One year we went seeking support for automating our originations processes. Another year we were looking at the possibilities of establishing relationships with a capital markets partner who could help us increase deal flow despite limited internal capital. You can find it all at this well-coordinated event each year.

However, a friend and colleague of mine, came to the AAPL conference for the first time as an individual private lender scaling his business beyond his own capital. Like us at our first conference, he was both excited and a little intimidated. The service vendors, capital partners, and large national originators have such an enormous presence at these types of events. In just sheer quantity of participants alone, they dwarf the small contingency of independent lenders; let alone their high level of involvement as sponsors. So much so, that smaller lenders like us can feel incredibly inferior and insignificant. The industry jargon alone can scare off many less experienced lenders who are not as integrated within the industry.

On the first day, my friend went into the expo and struck up conversations with various capital partners. In one instance, he was told by a capital markets rep that the days of lending out your own money and from friends and family were over. What a bold and, quite honestly, untrue statement. Never mind the fact how small it made my friend feel.

You see, it wasn’t that long ago when those larger industry players came to a screeching halt. Why? You may have heard about a global pandemic that shut the world down in March 2020. It’s effect on the financial services industry were profound.

It was at that time the pandemic took hold when I began to understand the difference between truly private money and what is traditionally known as hard money. Not by definition, but more about how it impacts the borrower. Anyone actively involved in real estate investing when COVID slowed down the real estate markets will likely have horror stories about trying to fund or refinance their projects during these “unprecedented times”; an overused phrase that just wouldn’t seem to go away.

In a matter of weeks, many lenders changed underwriting conditions by lowering loan to values (LTVs), leaving real estate investors at risk of losing earnest money. A lot of lenders stopped funding altogether or froze untapped rehab and construction funds being held back by the lender. Borrowers couldn’t pay invoiced past due, couldn’t initiate any new work, and some were still paying interest on funds not yet released.

But some lenders, including us at Flynn Family Lending, were still active and funding deals throughout last year. In the first few weeks of March 2020 alone, our company saved at least two investors nearly 100K in non-refundable earnest money when their other private lending sources backed out of the transaction with weeks to close. Why could we be in business but others not? The answer lies in their source of capital, or a more industry jargon way to explain it – it depends on the lender’s “capital stack”. Is it truly private or is it backed by institutional capital or dependent on secondary markets?

Most borrowers may not really know where their lender gets their capital and, quite frankly, they likely do not care if their deal gets funded. But when something like COVID happens or even a market correction or recession, and our deals are precariously in the hands of “flakey” lenders, we need to start paying more attention.

So how do I see the difference between private money and hard money? To me, private money is using your own funds or, to some extent, other people’s money to fund a real estate backed loan(s). Some within our industry will also refer to us as balance sheet lenders – those who do not sell out their loans but rather keep them on the books. For example, this could be trust deed lenders or pooled mortgage funds. The key here is these lenders have full control over their own capital sources.

 Hard money lenders, in contrast, may also utilize a pooled mortgage fund but have leverage on it – in other words, they use the fund to secure a warehouse line of credit from a bank or another institution to increase capital availability. They may also employ other capital deployment strategies such as using large capital market partners to table fund deals (also known as white labeling) or sell out funded loans on the secondary market as a way to increase deal flow.

You may say this is inconsequential, and before 2020, it was to a certain extent. However, whether a lender has control over their own capital or not, really makes a difference. Just ask some of your fellow real estate investor friends. If a lender taps out their pooled fund and no one is buying loans on the secondary market, which is what happened last year, the lender is benched from funding new deals until they can free up more capital. If a lender relied on capital partners to table fund loans, and these partnerships suddenly stop all loan originations – as they did last year – the lender is also sidelined, leaving borrowers in the lurch.

In contract, most true private lenders did not have these market constraints in capital deployment. Our business grew nearly 25% YOY in 2020, largely due to our own control of capital (and a lack of active competition). This year we will close out even better than last year by nearly 100%. This was a great opportunity to showcase our agility, flexibility and execution as a smaller lender. My capital investors still needed a safe place to invest for interest income and we could call the shots as a local lender, making their deals even more secure given the uncertain market conditions at the time. Those lenders with dependency on capital markets did not have this luxury. In fact, lenders and capital partners across the nation shuttered their doors for nearly the entire year and many only returned to pre-COVID capacity in Q2 of this year.

While this doesn’t necessarily make my private lending business any better than the institutionally backed private and hard money lenders in my market, COVID-related impacts on lending now mean borrowers must be more aware of these capital considerations if they want to avoid financing complications down the road, even with lending guidelines returning to pre-COVID accessibility. If the “bubble” is upon us, borrowers and lenders alike could find themselves scrambling as we did last year amidst the pandemic. Even if you are bullish about the market, understanding the capital constraints of your lenders is critical moving forward so you do not get stuck with deals which can’t be funded, losing you earnest money, being able to take down a good deal, or worse.

I’d be interested in your opinion on the difference between private and hard money and, more importantly, whether or not you think it really makes a difference and why. In theory I think it means little but when it comes to real world application it could mean the difference between closing on your next project or not.

Incidentally, at the conference this week AAPL announced a branding shift being addressed in the entire hard money space; moving away from past negative connotations of hard money in the money to private lending, which is much more professionally organized, standardized, and collaborative. While I don’t disagree with this move, I would prefer to see it called alternative lending as opposed to private money as I think it further divides the smaller, private lenders like myself from the larger players in the industry. The more we muddy the waters and do not differentiate the two, the harder it will be to bring the industry together.

Published on Bigger Pockets – The Little Lender That Could: How Independent Private Lenders Shine (

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