Are Private Money Lenders Getting More Conservative?

Question

Not sure if it's just me, but lately it seems like private lenders are being a bit more cautious with deals. Higher scrutiny on the numbers, exit strategy, and borrower experience.

Are others seeing the same thing, or is capital still moving pretty freely in your markets?

Curious what everyone's experience has been lately.

Jeff S. · Answer

For the longest time, @Charles Kennedy, both borrowers and lenders implicitly relied on market appreciation to bail them out of even marginal deals. You could see the growth here on BP, as everyone and their brother became a lender. Hopefully, those days are gone. Now, with ARVs flat at best and days on market increasing, you would have to be out of your mind to rely on even last year’s lending criteria. We have certainly changed ours.

Since the Great Recession, as ARVs rose monotonically, it was easy for us to make higher and higher dollar loans. Before we knew it, our average loan was uncomfortably large, and our loan volume was correspondingly smaller (though growing nicely, thank you very much). We also observed that there is a lot more risk in the larger dollar deals, say over $1M, and even experienced borrowers are not doing as well.

As a result, as we get paid back, we are only making substantially smaller loans. This doubles our loan volume but halves our return in dollars. These are faster deals to complete, so payback is quicker, which slightly increases our IRR. The benefit is lower risk for both us and our borrowers, and roughly the same to slightly higher total dollar volume for us.

Chris Seveney · Answer

Definitely taking a much harder look at the deals. Really analyzing borrower experience and credit, as well as spending a lot of time on the value of the property.

Chase Busick · Answer

@Charles Kennedy, yes private lenders in Oklahoma City are getting a little more cautious in order to protect their capital vs getting more returns.

With that said, all private lenders are different. Some may only have a little money to lend, where as some have a lot. There are still commercial mortgage broker options that usually have a lot more access to bigger private money lenders but you're having to pay broker fees...

With all that said, as someone that has done a little of it. The preservation of capital is always the first priority. PL's need to ensure that they protect their money by vetting REI's just like a landlord will vet a tenant.

Borrowers should have experience, hopefully a good deal, good P&L & BS, good income or job (which is always still nice as one is actively working & has an additional failsafe) good credit, multiple exit strategies, good rent rolls, reasonable LTV's, good schedule of real estate owned,  etc.

Yes, PL's are getting a little more cautious because they may have certain lending standards as well. Like is the deal good, is it in a favorable area, location, good price, good or bad condition? If it is in bad condition, are you asking for way too much without bringing any of your own capital to the deal? Is the project and scope of work too much for them to increase their risk profile?

There are so many variables at play. PL's can ensure the preservation & access to their capital by reducing their risk. One measure of that is lending less and go off some of the subdivision sales. Even with experienced investors, they can still go out of business if they are trying to be too showy or keep up with the Joneses. PL's should check their intent, and financials to ensure they are not on a sinking ship.

If a PL has to take it back, it is harder when they have more money in the deal as they have a lot of capital tied up. Can they get the same money they invested into someone, if they left a project unfinished.

To sum it all up, yes PL's are definitely improving their lending standards in order to be more optimized in their businesses and investments.