Hard Money Lending Runs on Logic
Despite all of the financial turmoil in the world, there are still loans to be made and there are still hard money lenders out there that are willing to make them. Deals are getting done, borrowers are getting the funding that they need, and investors are optimistically approaching as today's failsafe investment vehicle. What most people don't understand is that the rules of the game have changed - investors still want to make loans, but they're doing it in a way that relies much more on logic than on metrics and credentials.
Just to be clear, logical lending doesn't necessarily mean that it's an easier or simpler process. Most borrowers, brokers and investors are well aware that getting deals funded is tougher today than it used to be. Private lending isn't a "no questions asked" solution anymore. If you're in the industry, whether you're a broker or an investor, it's important that you spend your time focusing on the transactions that do make sense in this type of market, and the way to identify those comes down to some very basic logic. Utilizing some dumbed-down criteria can be a quick way to tell a good deal from a bad one:
- Property Location
Hard Money Lenders only want to make loans on property that is still in demand. Property in the boondocks or even in some slumping cities just isn't in demand, which means that discerning what its real market value is can be very difficult. Appraisals tend to vary widely and there's no way to gain confidence that rural properties would even sell if they had to be foreclosed upon and auctioned. Focusing on properties that are in demand is a big step in identifying good deals that are still doable in today's marketplace.
- Property Type
Certain property types just aren't worth the time anymore. A good example is land. Why bother working on land deals when there are plenty of opportunities to fund loans that are secured by property that's actually in demand? More good examples are industrial properties, adult venues, or trailer parks. It all comes down to the same question: Why bother? These property types pose a number of risks and issues, and a hard money lender simply isn't going to take the time to get down to the nitty-gritty with these types of properties. Unless the loan carries an ultra-low loan-to-value, it's time to skip it and move on.
- Borrower's Character
Sometimes borrowers can just give brokers, lenders or investors a bad vibe. Something about their situation doesn't make sense, their motivation doesn't seem to fit or they're using some reasoning that's doesn't mesh with logical reasoning. To a lender, this screams, "They're hiding something," or "I can't trust this person." In a market that's proven to be rampant with fraud and misinformation, lenders are being much more careful about who they lend money to. A situation that has a smell to it is going to be put to the test, so make sure that you're not wasting your time on deals that make your nose twitch.
- Old-Fashioned Common Sense
Most Hard Money Lenders will admit that they can be more subjective than objective at times. In some cases, there are simply going to be pieces to a deal that don't fit. A borrower may have sufficient collateral, but perhaps they're on a slippery slope and racking up more debt than they're going to be able to handle. Or, maybe they're making a significant down payment on a property that is in demand, but it's vacant and will need to be leased up in order to create a cash flow. These can be situations that may or may not fly with a private lender. You'll need to decide whether the good outweighs the bad and whether the borrower's situation warrants a closer look or if it just doesn't make sense to a take on the risk.
These are all things that any broker, borrower, lender or investor likely understands already, at least to some degree. What's important to realize though, is that these "logical, common-sense factors" are becoming more important than the metrics and measurements that we're so used to looking at from "the old way of lending" and current bank loans: LTV (based on appraisal), credit scores, DSCRs, DTIs, etc.
Just to be clear, logical lending doesn't necessarily mean that it's an easier or simpler process. Most borrowers, brokers and investors are well aware that getting deals funded is tougher today than it used to be. Private lending isn't a "no questions asked" solution anymore. If you're in the industry, whether you're a broker or an investor, it's important that you spend your time focusing on the transactions that do make sense in this type of market, and the way to identify those comes down to some very basic logic. Utilizing some dumbed-down criteria can be a quick way to tell a good deal from a bad one:
- Property Location
Hard Money Lenders only want to make loans on property that is still in demand. Property in the boondocks or even in some slumping cities just isn't in demand, which means that discerning what its real market value is can be very difficult. Appraisals tend to vary widely and there's no way to gain confidence that rural properties would even sell if they had to be foreclosed upon and auctioned. Focusing on properties that are in demand is a big step in identifying good deals that are still doable in today's marketplace.
- Property Type
Certain property types just aren't worth the time anymore. A good example is land. Why bother working on land deals when there are plenty of opportunities to fund loans that are secured by property that's actually in demand? More good examples are industrial properties, adult venues, or trailer parks. It all comes down to the same question: Why bother? These property types pose a number of risks and issues, and a hard money lender simply isn't going to take the time to get down to the nitty-gritty with these types of properties. Unless the loan carries an ultra-low loan-to-value, it's time to skip it and move on.
- Borrower's Character
Sometimes borrowers can just give brokers, lenders or investors a bad vibe. Something about their situation doesn't make sense, their motivation doesn't seem to fit or they're using some reasoning that's doesn't mesh with logical reasoning. To a lender, this screams, "They're hiding something," or "I can't trust this person." In a market that's proven to be rampant with fraud and misinformation, lenders are being much more careful about who they lend money to. A situation that has a smell to it is going to be put to the test, so make sure that you're not wasting your time on deals that make your nose twitch.
- Old-Fashioned Common Sense
Most Hard Money Lenders will admit that they can be more subjective than objective at times. In some cases, there are simply going to be pieces to a deal that don't fit. A borrower may have sufficient collateral, but perhaps they're on a slippery slope and racking up more debt than they're going to be able to handle. Or, maybe they're making a significant down payment on a property that is in demand, but it's vacant and will need to be leased up in order to create a cash flow. These can be situations that may or may not fly with a private lender. You'll need to decide whether the good outweighs the bad and whether the borrower's situation warrants a closer look or if it just doesn't make sense to a take on the risk.
These are all things that any broker, borrower, lender or investor likely understands already, at least to some degree. What's important to realize though, is that these "logical, common-sense factors" are becoming more important than the metrics and measurements that we're so used to looking at from "the old way of lending" and current bank loans: LTV (based on appraisal), credit scores, DSCRs, DTIs, etc.
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