Are Private Mortgage Lenders Still Relevant In 2017?
Are private mortgage lenders still needed in the current real estate market?
Real estate and finance markets are changing swiftly. What role can, and will private lenders play? What will they fund? Where can frontline investors find them? How do both parties create win-wins that are valuable in the emerging landscape?
The Real Estate Lending Void
The mortgage market collapsed by around 90% amid the crises of 2008. Thousands of mortgage brokerages, lenders, and banks went bust. Those that survived cut back on loan programs and credit to the extreme. The flow of borrowed money was virtually choked off.
Things have been changing. More mortgage and funding sources have been showing up. However, capital has remained very tight, underwriting process remain a nightmare, closings are unpredictable, and some forms of financing, like construction loans, are still very elusive.
Opening the Vault
Many are hoping that Donald Trump is about to crack open the vault, and start the free flow of money again. This largely relies on repealing Dodd-Frank, and the enforcement of regulations. We’ll have to wait and see how that plays out. However, new confidence in the economy and housing market, and higher interest rates, could play a role in encouraging lenders to be far more competitive and aggressive in making loans. New alternative lending platforms which allow banks and funds to circumvent traditional origination methods is also helping to make more capital available to some extent. The nation is split on where they see the mortgage and credit market going, and how relaxed they really want it to become. A return to the subprime days could be beneficial in one way, but disastrous for many in the longer term.
Financing for Real Estate Investors
Real estate investors have many different financing needs today. There is the buy and hold crowd looking to expand and refinance portfolios of rental properties. There are real estate wholesaling experts who need transactional funding and working capital. There are rehabbers and house flippers needing cash to buy properties, make repairs, and hold while they are remarketing them. Investors and builders at all ends of the spectrum need money to construct new properties. Then there are a whole slew of new real estate related startups looking for business funding.
The Challenges
Right now, there is a huge demand for real estate financing. Yet, despite all the ads and offers from institutional lenders there is still often a big gap between the need and desired experience, and what banks and mortgage companies can deliver.
Among the challenges are:
- Competition for capital
- Competition faced in bidding on deals
- The underwriting process
- Appraisals
- Confidence in closing on time
- Cost to raise capital
- Chains of money brokers layering on fees and shuffling paperwork
The Benefits of Private Money Lenders
Private real estate lenders offer many benefits for investors. This is especially true for house flippers.
Private lending offers:
- Fast capital
- Quick closings
- Flexible terms
- Low hassle
- Minimal paperwork
- Cash for buying and fixing houses
- Competitive terms
The Benefits for Private Lenders
Private money lenders are still very much needed and desired in the real estate space. However, it must continue to be a win-win for both sides. For now, real estate lending is still incredibly attractive for private individuals with cash too. There are very few alternatives that can compete.
It offers:
- Competitive rates of return
- An easy way to profit from real estate
- Ease of investment
- Safety of being secured by real estate
- A chance to help others and the economy
- Potential tax benefits
At least until CD rates make it back up to 5% plus, private lending will be a win-win for both sides. Even then many private individuals will want far higher returns, and investors may be willing to pay them.
5 Ways of Finding Private Lenders
- Local in-person networking
- Working through licensed mortgage brokers
- Relationships with hard money lenders
- Online ads
- Software for pinpointing new private lending contacts
