In many ways the private lending and hard money landscape is like the Wild West. Whereas it’s pretty obvious where a bank or credit union’s money comes from, it’s way more obscured when it comes to direct hard money lenders. Loan originators freely advertise as direct lenders, and brokers don’t always disclose their relationship to their funds. It can get really murky really quickly as to “how close to the money” your lender really is.
What is a direct lender?
On the surface this seems like an easy question to answer: A direct lender is anyone who is lending their own money and does not require approval from anyone else to make the loan. But as you pick this apart you start to realize how limited this really is. High-net-worth individuals can and do directly lend without any external approval process. But they are hard to find and their funding source is not scalable beyond their own assets. At any given time they may or may not be able to fund your deal or have time to even look at it.
In today’s hard money landscape, more common are loan originators and funds operating as direct lenders. These hard money lenders are tied into private money but offer a level of professionality, expertise and scalability that individual private lenders cannot. These lenders, while not lending their own money, are the decision makers and can fund deals with only internal approval. Money sources for these lenders are high-net-worth individuals, large funds and other direct lenders. This is the category Little City Investments falls into.
Looking for a direct hard money lender? Get your deal funded now.
What is a broker?
Here’s where it gets tricky. In private lending terms, a broker is anyone who helps the borrower find money for their deal. They are not a lender, but a facilitator. The problem is that some brokers pretend to be direct lenders to increase their lead generation pipeline. In Texas, they don’t even have to be licensed as brokers. These brokers often have no money to lend and must rely on the various approval requirements from each direct lender they shop your deal to. This is not ideal for two reasons:
- The direct lenders they are shopping your deal to also charge points, so your closing costs are automatically increased by the middleman being involved. Sometimes a broker will even go through another broker to get to a direct lender. Once this starts happening, the deal often collapses due to skyrocketing points and inefficient communication.
- Brokers don’t have their own terms and must rely on the terms of the direct lender, so they can’t really give you accurate terms up-front. And, as they shop your deal around, loan terms can change dramatically.
But it’s not all bad. Hard money loan brokers exist because they get deals done. They often have the best industry connections and can know where is best to place your loan. The good ones pound the pavement and get you the best terms possible. If your deal is particularly unusual, a reputable, experienced broker can save you time and streamline the funding process.
Are you a broker? Find our more info about brokering deals to us.
What’s best? A direct lender or a broker?
In most cases it’s best to seek out a direct lender, or someone operating as one, for your hard money loan. You’ll likely pay less points and will be able to get firm terms more quickly. If you can find a high-net-worth individual you can trust, by all means go for it. But be aware of their limitations. Otherwise, a direct-lending, hard-money company is likely your best bet.
You should always ask your lender if they are a direct lender and where they source their funds. However if your deal is unusual or you don’t have the time to shop around, then a broker could be right for you. But good luck finding them because they usually say they’re lenders too!
At Little City Investments we primarily operate as a direct lender. While we are not a fund, we do directly source money from high-net-worth individuals and trusted direct lenders we have made legal arrangements with. We are the decision-makers on the bulk of our deals, and we service all of our loans ourselves. But! We also broker loans too. (And we’re transparent about that process.) When borrowers come to us with deals that do not fit our criteria, we can often broker them to direct lenders who can fund them. With over a decade of hard money lending experience, we have developed a long list of potential funding sources for almost any kind of deal. So even if we can’t lend on it ourselves, we can get your deal done.