Is Hard Money going away?

Question

Hi BP family,

I spoke to a lending broker today and wanted to know if you herd that Hard Money/Private money lending will discontinue in 2014?  Is this true?

Jimmy Hong · Answer

That was very informative Bill Gulley .  Thanks.

Jimmy Hong · Answer

Just spoke with my HML and he confirmed his company will not be doing consumer purpose loans.

Dennis Williams · Answer

Thanks Ann!!

Ann Bellamy · Answer

Dennis, Dodd-Frank was passed in 2010, and in my opinion, most companies/lenders have already made the adjustments necessary to comply, or have shut down if that was their decision, at least in my area.  In New England, I don't know of any lenders who have shut down as a result, if anything, we are seeing more lenders, not fewer.

Although the majority of hard money lenders here were already lending commercially and not to consumers anyway.

Dennis Williams · Answer

Yes that is it.

Ann Bellamy · Answer

Could he have been referring to Dodd-Frank?

Dennis Williams · Answer

Thanks Bill for your response. It was very informative. Ann, I do not remember the law coming out in 2014 he spoke of, but it sounded like Doug Law or something beginning with a D.

Ann Bellamy · Answer

Dennis, what was the broker's reason for saying it would stop?

Bill Gulley · Answer

Actually, I'd say many will stop in time.

Many private types, individuals that toss loans out like we did 10 years ago isn't going to happen. That's over with.

HMLs that are in hot markets, New England area like @Ann Bellamy who have good contacts on small commercial deals will be able to hang in there.

I'd say if you're a HML in slower or smaller markets will have problems keeping a real office open. If they are regulated, requiring an office, CPA and accounting and other overhead issues, it will get harder to profit.

I had a very unique operation and made loans to investors, a few good ones, rehab, flips, but really, even at higher rates in some cases, interest on a loan for 6 months is not a reliable and profitable venture. Small flippers didn't account for ten per cent, that wasn't my niche and they are a headache with construction disbursements. The money is in longer term deals, retail financing, sold notes and installment contracts.

In financing money has to move to profit. A flipper will borrow for 3 to 6 months, his next deal may be 3 or 6 months away, APR wise, your return is cut in half keeping money in a drawer to fund him. Pretty much why registered HML types have high fees and rates.

I'd say too that those simply catering to residential/commercial investors will eventually have issues as they can not guarantee their money will always be out on a commercial use basis. I'm sure some will get hung regardless of how hard they try, some risks you can't avoid.

It's getting harder for brokers to pick up cash investors too, they have other options, regulations increase, average investors won't take the risk of some broker being in compliance. So, the source of funds take a hit too for small brokers.

Another aspect, hard money is usually going to those who can't walk into the bank, lack of experience, credit issues, etc. As these prime customers gain experience and build their business, they'd have mental issues if they don't start going to banks as they improve, hard money is a starting place, any astute business type isn't going to pay more than they have to for money or services. HMLs make up for some of this by speed of funding, but really, after awhile a bank can flip out money quickly for good customers and, as they gain knowledge they avoid jumping through their tail in doing deals.

If you're in a big market I can see potential, if you're not, or if others enter the market, they will have a problem keeping the doors open for 15 or 20 regular borrowers.

I've done some unsecured private lending, short term consumer stuff, it takes a good regular client base to keep the lights on.

Bottom line, I think many will get out. Internet types may fill the gap in low volume markets. I have no experience with internet lenders, but I can't see them doing flash funding on deals, part of the advantage of see your HML in person.

Just my opinion, I think in time there will be a trickle through effect on lending overall, on smaller lenders. Probably part of the reason the banks are smiling. :)