How are the changes affecting hard money lending?

As the chairman of a private asset-based lender, I am often asked if increasing interest rates at the federal level will affect the rates available to hard money borrowers. What I tell my clients is this: “What affects your rate in the private money space is simple supply and demand. The more money there is available to lend, the lower the rates can be for borrowers. “

Supply and demand affect everything from the price of housing to the price of money. Both large and small lenders are affected by these fluctuations. For example, at the bottom of the real estate market in 2009, when many people wondered when or if values ​​would return, there was little capital available to lend privately. For this reason, I saw hard money interest rates averaging 18% from 2009 to 2012. As the market improved and more capital came in, the rates fell.

Fast forward to today when so many people are willing to pay for convenience. Consider companies like direct real estate buyers Opendoor, Offerpad, and We Buy Ugly Homes, as well as online used car dealership Carvana and others, and you’ll find an abundance of options – options that seem to be out there. to stay.

While hard money interest rates will continue to be driven by supply and demand first, there are four factors that play roles, to varying degrees, in determining rates: supply of money (as discussed above), location of the property (think state, not street), leverage (i.e. amount of borrower’s financial interest in the transaction) and underwriting criteria (the terms under which a lender is willing to lend). Here’s a more detailed look at these four categories.

1. Money offer: In markets with a greater amount of money to lend, such as California, the rates are generally lower.

2. Location: This factor considers mortgage states versus trust deed states. In trust deed states, which are states where lenders can foreclose through trust sales, the rates are generally lower. Lenders may offer slightly lower rates in these markets because the foreclosure process is less expensive and time consuming than in mortgage states, which require foreclosures.

3. Leverage effect: The lower the “loan-to-value” (the amount borrowed against the current or future value of a property), the lower the rates that hard money and traditional lenders can offer. The share of “skin in the game” that a borrower has will always affect the rate, whether institutional or private.

4. Subscription criteria: As a general rule, the more rigorous the underwriting process, the lower the rates. Just as location plays a role in determining a lender’s overhead costs, underwriting regulations play a role in the stringency of a lender’s underwriting criteria. For example, some hard / private money lenders (especially those with ties to institutional capital) are required to obtain credit checks, reserve checks, and ratings, which can slow down the lending process. . Compare that with lenders who are truly “asset-based” (that is, they underwrite the asset, not the borrower), and you might understand why some lenders charge higher rates. high and why others are able to act faster.

It will be interesting to watch the industry as it continues to evolve. I believe the influx of institutional capital and the abundance of capital in general in this space is here to stay. However, interest rates will continue to be driven first by supply and demand and then, to a lesser extent, by the other factors listed above.

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