Hard money often gets a bad name in the mainstream media. Is that because hard money is really ‘loan shark’ money, as so many journalists and writers claim? No. It is the result of so many misunderstandings about what hard money is. A case in point is a 2014 article published by the Sacramento Bee.
That article detailed the perils of a Nevada couple who found themselves in financial straits after having been bilked by what the Bee described as a “hard money broker”. To anyone who knows how hard money actually works, therein lies the problem. A hard money broker is not the same thing as a hard money lender. Similarly, a mortgage broker is not the same thing as a mortgage lender or a bank.
Ripped off by a Con Artist
The couple featured in the Sacramento Bee article were legitimately ripped off by a con artist. They were not the only ones. That same broker misled untold numbers of investors, many of whom lost their entire life savings. But what this broker was doing violated nearly every law that regulates hard money in Nevada.
Despite what so many people claim, hard money is regulated. Genuine hard money lenders must be licensed by the states in which they operate. They must treat their customers fairly, they must practice full disclosure, they must prepare legally binding loan documents, etc. A legitimate hard money lender is not a loan shark working from a dark alley.
Charges against the Nevada broker demonstrate that he was not operating a legitimate hard money business. He was running an investment scam no different than your typical pyramid scheme. He would take money from investors to make questionable loans, then take more money from new investors to pay off the original investors – all the while hoping his loans would pay off.
What Brokers and Lenders Do
Whether you are talking hard money or traditional mortgage lending, a broker does not actually lend any money. They act as a go-between to connect lender with borrower. Being a broker is a perfectly legitimate business. Likewise, lenders operate legitimate businesses by making loans to qualified borrowers.
In a genuine hard money scenario, a licensed hard money lender is not running around town soliciting investments from retirees and unsuspecting entrepreneurs. Most hard money lenders are actually companies comprised of a small number of individuals who have combined their financial resources to make loans. Actium Partners, out of Salt Lake City, Utah, is one example of a legitimate hard money lender.
More Private Lending Than Anything Else
None of what is described here accurately reflects what the Nevada broker was doing. He was not putting up his own money. He was not working with a small group of like-minded investors to pool finances for lending purposes. Instead, he would find somebody looking for hard money and then go in search of investors willing to fund that individual’s request.
Along the way, investigators say that the broker was lying to both investors and borrowers. According to the Bee, this particular broker wasn’t alone. They looked at 20 years of Nevada history and discovered that self-described hard money brokers had been stealing from Nevada investors for decades.
The big take-away here is simple: hard money brokers are not the same thing as hard money lenders. Furthermore, just because some self-described hard money brokers are lying to people and robbing them blind does not mean the entire hard money industry is fraudulent. There are bad apples in every industry – the traditional banking sector included. Hard money isn’t the black sheep.