(Caveat emptor: I don’t have any actual hands-on experience dealing with hard money lenders, so what follows is based solely on lots of research, poking around forums, talking to other investors, etc.)
The term “hard money lender” is basically just a fancypants investor way of talking about a private lender. This is basically anyone that has extra money sitting around, who is looking to lend it to someone else in exchange for interest. A hard money lender is often an individual but can be a corporate entity as well. If your rich uncle loans you money to flip a house, he’s a hard money lender; if you’re about to be foreclosed on (and have terrible credit and massive personal debt) and have no choice but to get a loan from Sammy the Shark at 15% interest, you’re dealing with a hard money lender.
While most hard money lenders make their bucks loaning cash at exorbitant interest rates to desperate people with bad credit and/or lots of debt (otherwise those folks would use traditional lenders and get much better rates), some do deal with real estate investors looking to flip houses. From the flipper’s point of view, a hard money loan can be attractive despite the higher interest rate because there’s no limitation on how much the loan can be for, and what it’s used for. Unlike a traditional mortgage, a flipper can often get a hard money loan that includes the purchase price, closing costs, and the cost of renovations, so that they’re essentially flipping a house with $0 out-of-pocket expenses.
So why wouldn’t all flippers use hard money loans? First and foremost, they’re harder to find, and you’re not always dealing with mortgage lenders that have a stellar reputation, decades of operational success, and shiny, well-lit offices just around the block. That’s not to say that there aren’t many reputable, solid hard money lenders out there; there are. Because of the higher interest rates and other costs, the main drawback of a hard money loan is that it’s simply more expensive for the investor, and bites more deeply into your profit margin.
If you can pay cash or qualify for a conventional loan, that’s usually preferable, simply because it’s easier and saves you money. But hard money loans are definitely a viable option for flippers, and shouldn’t be ruled out, especially if you’re just getting started and need to be creative about raising the capital to get started.
A decent jumping off point for finding hard money lenders can be found here at REIClub, which lists 50 or so hard money lenders throughout the US.
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