{"id":145809,"date":"2022-12-01T10:17:45","date_gmt":"2022-12-01T17:17:45","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=145809"},"modified":"2024-02-24T12:12:41","modified_gmt":"2024-02-24T19:12:41","slug":"lenders-are-feeling-the-correction-too","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/lenders-are-feeling-the-correction-too","title":{"rendered":"Lenders Are Feeling The Correction Too\u2014Can You Still Get Your Deals Funded?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC8261563602&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">It\u2019s pretty safe to say we\u2019re amidst a market correction. While some may challenge whether or not we\u2019re in a true recession yet, the fact remains that the real estate investing game has changed drastically since the beginning of the year. War in Ukraine,&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.cnbc.com\/2022\/11\/30\/fed-chair-jerome-powell-says-smaller-rate-hikes-could-come-in-december.html\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">multiple interest rate hikes<\/span><\/a><span data-preserver-spaces=\"true\">, housing inventory rising again with increasing days on market; the list of alarmist headlines continues to grow with each passing day. The impact of these market changes has also affected real estate lending significantly. Just as with the early days of Covid, we\u2019re starting to see lender \u201cfragility\u201d affecting investors\u2019 ability to close deals.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">What Does This Mean For Investors?<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Unstable interest rates impacting deal analysis, additional underwriting conditions with tightened lending guidelines, lower&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.investopedia.com\/terms\/l\/loantovalue.asp\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">loan-to-value<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;(LTV) requiring more money out of pocket, and potentially lower&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/estimate-arv\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">after-repair values<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;reducing anticipated profit margins. Why you may not be able to change what is happening in the market, what you do have control over is understanding and being selective with your chosen sources of capital for investments.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Similarly, this happened back in March 2020 and the months to follow. Many large national and regional hard money lenders significantly changed their lending criteria amidst market uncertainty. These immediate changes in underwriting conditions left real estate investors at risk of losing <a href=\"https:\/\/www.biggerpockets.com\/glossary\/earnest-money\" target=\"_blank\" rel=\"noreferrer noopener\">earnest money<\/a> unless they brought additional capital required to close. Quite a few lenders stopped funding altogether or froze untapped rehab and construction funds being held back by the lender. Borrowers couldn\u2019t pay invoices past due, couldn\u2019t initiate any new work, and some were still paying interest on funds not yet released.&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">But do you know why? Most borrowers may not know where their lender gets their capital, and quite frankly, they likely do not care as long as their deal gets funded. But when something like the pandemic happens or even a small market fluctuation\u2014when your deals are precariously in the hands of \u201cflakey\u201d lenders, you need to start paying attention. Often lender performance has to do with the lender\u2019s source of capital. After all, these institutions make their revenue off your loan origination, so, in theory, they need and want your loans to close.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">A Lender\u2019s Control Over Capital Makes a Huge Difference<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">You might say this is inconsequential, and before 2020, it was to a certain extent. However, whether a lender controls their own capital or not makes a difference. Just ask some of your fellow real estate investors. If a hard money lender taps out their pooled fund and no one is buying loans on the secondary market, which is what happened last year, the lender is benched from funding new deals until they can free up more capital. If a lender with a private debt fund chooses to get a warehouse line of credit secured by the assets held in the fund (loans\/notes), they could succumb to abrupt capital constraints hampering their ability to originate new loans. If your lender relied on capital partners to \u201ctable fund\u201d loans and these partnerships suddenly stop all loan originations as they did in 2020, the lender is also sidelined, leaving borrowers in the lurch.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">In contrast, most true private lenders do not have these market constraints in capital deployment. Our private money matchmaking business grew nearly 25% year-over-year post-Covid, largely due to our own control of capital (and a lack of active competition). This was a great opportunity to showcase our agility, flexibility, and execution as a smaller lender with no ties to Wall Street. My capital partners still needed a safe place to invest for interest income, and we could call the shots as a local lender, making their deals even more secure given the uncertain market conditions at the time. Those lenders with dependency on capital markets do not have this luxury. In fact, lenders and capital partners across the nation shuttered their doors for nearly the entire year, and many only returned to pre-Covid capacity in the second quarter of 2022. With recent rate hikes, these large lenders are feeling the squeeze financially again.<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">The Fed has raised rates several time<\/span>s with a Federal funds rate now set at <a href=\"https:\/\/www.forbes.com\/advisor\/investing\/federal-funds-rate\/#:~:text=The%20Federal%20Open%20Markets%20Committee,currently%203.75%25%20to%204%25.\" target=\"_blank\" rel=\"noreferrer noopener\">3.75%-4%<\/a><span data-preserver-spaces=\"true\"> and a possible target rate of 4.75% &#8211; 5% by early 2023. As a result of higher interest rates and their trailing effects on the real estate market, once again, we find lenders pausing their loan originations\u2014either temporarily for a few months or indefinitely. Some lenders are shuttering altogether. However, unlike the pandemic-induced shutdown of 2020, this modification to the lending world is likely to stick around much longer. Even if you are bullish about the market, understanding the capital constraints of your lenders is critical moving forward so you do not get stuck with deals that can\u2019t be funded, losing you earnest money, being able to take down a good deal, or worse.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Know Where Your Lender Gets Their Capital<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">More than ever, investors need to be aware of the sources of capital that back their projects. Long gone are the days of shopping around for the lowest rates and points. Rather, you need to ensure a high likelihood of performance so that your deal isn\u2019t jeopardized. Most investors are familiar with traditional hard money lenders and their terms, but private lenders are a different type of lender entirely, and realizing what those differences are can help an active investor pick the best tool for the job.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">Here are just a few questions that you could use to interview your lending options on a potential project in order to find the right lender for your individual circumstance:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Are you a direct lender?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">How will my loan be funded, and is this capital controlled by your company, or will an outside partner fund it?&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Please explain how your underwriting approval process works and who the decision makers are, who sets loan rates and terms, and who provides loan approval.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">If teams outside your local office complete loan approvals and underwriting, could you tell me who and where these decision-makers are located?<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Do you have some borrower references that I could speak with regarding their experience with you?&nbsp;<\/span><\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">There are definitely advantages to having institutional hard money lenders in the market. In the past, emerging national hard money lenders backed by institutional partners were the catalyst driving down the cost of capital for real estate investors. Institutionally-backed lenders could offer lower rates, larger loan amounts, and in some circumstances, tolerate higher risk due to sheer loan volume and velocity. But when there is uncertainty in the market, as there has been this year, depending on who you talk to, lender performance will become a necessary means of evaluating your loan options, not just the cheapest rate. <\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Conclusion<\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><span data-preserver-spaces=\"true\">As you have seen, the difference in where your capital is coming from has real-world effects on your business as an active investor. Possibly the most crucial aspect of your business is being able to obtain leverage quickly, consistently, and easily. Knowing where that source of capital is coming from will be crucial to the success of active investors moving forward in these uncertain times. So while looking for a lender, don\u2019t discount the little independent lenders that can get the job done!<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size wp-block-paragraph\" style=\"font-style:normal;font-weight:800\">All the cash flow, none of the hassle<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color wp-block-paragraph\" style=\"font-size:16px\">Learn how to create financial freedom and passive income in real estate as a private money lender.\u00a0<em>Lend to Live<\/em>\u00a0makes passive income through private lending achievable for anyone. <\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/lend-to-live?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Lend to Live Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/lenders-are-feeling-the-correction-too&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n\n\n<div id=button-custom-event-block_641384b1eb1d8 class='button-custom-event'>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/07\/lendtolive-cover-scaled.jpeg\" alt=\"lend to live cover\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<p class=\"wp-block-paragraph\"><\/p>\n","protected":false},"excerpt":{"rendered":"<p>It\u2019s pretty safe to say we\u2019re amidst a market correction. While some may challenge whether or not we\u2019re in a true recession yet, the fact remains that the real estate [&hellip;]<\/p>\n","protected":false},"author":613616,"featured_media":145811,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7119,8],"tags":[],"class_list":["post-145809","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-biggerpockets-daily","category-real-estate-trends"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145809","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/613616"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=145809"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/145809\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/145811"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=145809"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=145809"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=145809"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}