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Real Estate Assets Are Interesting Investments For Private Hard Money Lenders

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The standards for mortgage qualifications are becoming increasingly tight. While this makes life difficult for some, it also means there are new opportunities for private hard money lenders out there. Indeed, anyone who has some money could consider becoming involved in this, particularly because they are backed by the security of always having a buffer of between 25% and 30% since that is the maximum loan to value. Naturally, it is important to exert due diligence in this.

Crowdfunding and Self-Directed Investment Opportunities

Numerous experts agree that there are more and more opportunities out there for private hard money lenders. They are there to fill the gap left by the institutional lenders stepping away from mortgages as a result of the Dodd Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank Wall Street Reform Act is a law that regulates the financial markets and protects consumers. Its eight components help prevent a repeat of the 2008 financial crisis.

Traditionally, private investors would opt for an IRA or 401k with a focus on real estate investments. Doing this conservatively means that no more than 20% of the retirement account is invested in this, which means another 80% can be invested in a range of other assets, including crowdfunding. The added benefit is that crowdfunding investing can be done outside of the retirement accounts as well. Indeed, again and again, this has been shown to be very secure.

Over the last several years, there has been extraordinary interest in private lending, as it has proven to be both profitable and—on a risk-adjusted basis with proper underwriting and due diligence—secure.

Property Valuations Are Conservative

One of the things that set private hard money lenders apart from banks is that they use a very different underwriting process. Traditional mortgages are limited to 90% for 30-year mortgages. Hard money lenders don’t focus on an applicant’s credit history, instead of looking at the value of the property. They then provide a loan for no more than two years. Additionally, hard money lenders offer much higher interest rates than traditional lenders. Lastly, hard money focuses strongly on distressed properties, rather than traditional homes.

The security of a hard money loan lies in the property itself. This means the valuation methods used have to be more conservative. The professional appraisal is important, but other tools are used as well. This is because appraisals are geared towards traditional mortgages, are based on the opinion of just one individual, are often wholly different to the agreed purchase price, and don’t consider the potential in distressed properties.

Hard money lenders take all the information available to them and make a decision based on that. They simply want to know whether they can get their money back and whether they can make a profit, even if this means taking the property back. This is also why they will only offer a 75% loan to value as a maximum, which gives them that protection. Additionally, they look at properties as if they are the fixer and flipper themselves.

With their singular focus on turning a quick profit, real estate investors are often regarded about as warmly as used-car salesmen. But experts say they’ve played a major role in spurring the housing market’s recovery. By targeting distressed properties, they’ve reduced neighborhood blight and increased the supply of homes in a region where inventory has been very tight.

Clearly, those who have money to invest, and who have at least a baseline of understanding of the housing market, should consider becoming hard money lenders. In so doing, they not only help themselves, but they also help assure economic recovery.

Big Changes In Mortgages As A Result Of Private Lending

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There are quite limited options available to people who own real estate if they wish to refurbish or if they want to purchase real estate that requires refurbishing. Mortgage lenders do not usually like to take a gamble on a property’s potential worth sometime in the future. The result is a growing demand for private lenders who would be happy to provide fix and flip loans, bridge loans, and refurbishment loans.

Many private lenders are people who were in the real estate investment market themselves and who realized that there is a gap in provision because they themselves experienced to difficulty of getting funds. What this means is that these lenders have a true understanding of the needs of the market and, therefore, have the potential to deliver a relevant and fit for purpose service. So popular are their services now that their market share seems to be growing rapidly.

In 2011, 50 percent of all new mortgage money was loaned by the three biggest banks in the United States: JPMorgan Chase, Bank of America and Wells Fargo. But by September 2016, the share of loans by these three big banks dropped to 21 percent.

Truly determining market share is difficult, however, because the private lending market is potentially huge. One way to look at it is by determining the number of properties that are refurbished and sold on. Another way is to simply determine the percentage of properties that are fix and flippers.

Fix and Flips Across the Nation

According to the latest 2016 Year-End U.S. Home Flipping Report, which looked at counties that are home to around 80% of the country’s population, 193,009 condos and single family homes were flipped in that year, defining a “flipped” property as one that is bought twice within a 12 month period.

ATTOM Data Solutions, curator of the nation’s largest fused property database, today released its 2016 Year-End U.S. Home Flipping Report, which shows that 193,009 single family homes and condos were flipped – sold in an arms-length transfer for the second time within a 12-month period – in 2016, up 3.1 percent from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.

It has also been estimated that if the other 20% of the market was included, there would be a total of 300,000 flipped properties in 2016. Considering that the average price is $189,000, the market is worth $56 billion. That is a huge amount of money, which certainly makes this market very interesting to lenders, particularly because they know that traditional banks aren’t interested in this. There is a huge opportunity for anyone who has the private funds available.

It has also been estimated that around a third of the flips in 2016 were financed. This means that around $17 billion was borrowed in 2016, a significant amount of money. While it is certainly true that determining exact market share is almost impossible, even accounting for standard deviation and mistakes, this share is significant.

Our industry’s uniqueness makes it challenging to analyze market share. We don’t have the standardization of the traditional mortgage market, where most deals flow through a handful of secondary market players who freely share loan-level, portfolio-level and industrywide data.

Unique Characteristics of the US Real Estate Market

The real estate market in this country continues to be unique. There are entire areas where there are far more home buyers than what there are properties for sale. Flippers must act very quickly if they are to find a deal, even if the kinds of properties they are interested in require substantial refurbishment. Unfortunately, traditional lenders, even if they are independent or a credit union, take several weeks before they can close on a loan, and those are weeks flippers simply do not have.

Flippers like to find tricky deals, although these are high risk, because they also have the potential for a huge payout. Flipping is not just about applying a new coat of paint and laying down some new flooring, which are things that anyone can do. True flippers purchase properties that are in a state of disrepair and require substantial modernization and renovation. They must also consider environmental problems, rewire the electrical system, put in new plumbing, and so on. These are the deals that flippers look for, because they are the deals that most people don’t want to take on. Naturally, the banks are reluctant to work with these properties, again increasing the need for a private lending alternative.

Hard Money Lenders Focus on Fix and Flip

The vast majority of hard money loans focus on fix and flip properties. However, others are used for sort term refinance, development, land acquisition, construction loans, and bridge loans. While this is not a huge portion of the overall hard money lending market, it is another piece of the overall financial pie. It looks like growth in the private lending market, therefore, will continue to grow, particularly in the suburban markets where there are many infill projects and revitalization projects.

So long as there are investors who are happy to diversify their portfolios and take risks because of the potential for a high return, private loans will continue to be available. So much so, in fact, that some are calling for private lending to become an official alternative to mortgages. Not just that, many financial advisors now consider it as an option to diversify the portfolio of their clients. Real estate has always been a solid investment, after all.

There is one caveat, however, and that is that many people now think that it is easy to fix and flip. There are many reality TV shows that make it look like the easiest and most fun job in the world. What these show fail to indicate, however, is that there are associated difficulties that can make a project turn sour. This has increased the risk for private lenders, who now have to spend slightly more time in determining whether a request for funds has been made by those who are experienced in this particular field and know what they are doing, rather than simply someone who has watched HGTV’s Fix or Flop series.