Impact of COVID-19 on the U.S. Hard Money Lenders
A new RealEstateBees.com survey of over 2,000 active hard money lenders found that despite the negative impact on their business caused by the COVID-19, more than 80% are seeing new opportunities opened by the pandemic.
The following segmented report provides results of a large scale survey—Impact of the Coronavirus on the U.S. Real Estate Businesses—conducted by the Real Estate Bees research team, leading real estate platform for real estate professionals.
The following statistics reflect the situation among the US hard money lenders. We reached out to over 2,000 active private money lenders from all the 50 U.S. states and Washington D.C. to collect their insight on the impact of the COVID-19 pandemic on the industry in general and their businesses in particular.
The report is divided into the following two parts.
1. Multiple choice questions where the professionals had to choose one of the suggested answers to each question:
1.1 Is there a negative impact the pandemic is having on hard money lenders?
1.2 Has the pandemic opened any unexpected opportunities for hard money lenders?
1.3 How are you adjusting your marketing budget?
1.4 Are you transferring your business to a “work from home” basis?
1.5 Have you noticed any benefits of transferring your business processes to a “work from home” basis?
1.6 Have you noticed any drawbacks of transferring your business to a “work from home” basis?
1.7 Will you keep your business processes transferred to a “work from home” basis after the pandemic is over?
2. Open questions that allowed the experts to share their insights on various aspects of the impact of the coronavirus pandemic on the U.S. hard money lenders:
2.1 What are the specific negative impacts the pandemic is having on hard money lenders?
2.2 What unexpected opportunities have the pandemic opened for hard money lenders?
2.3 If you knew the impact of this situation on your business in advance, how would you prepare your business to mitigate your losses or even profit from it?
2.4 What marketing channels do you prefer to use during the pandemic over the rest and why?
Is there a negative impact the pandemic is having on hard money lenders?
Has the pandemic opened any unexpected opportunities for hard money lenders?
How are you adjusting your marketing budget?
Are you transferring your business to a “work from home” basis?
Have you noticed any benefits of transferring your business processes to a “work from home” basis?
Have you noticed any drawbacks of transferring your business to a “work from home” basis?
Will you keep your business processes transferred to a “work from home” basis after the pandemic is over?
What are the specific negative impacts the pandemic is having on hard money lenders?
Key takeaways from the hard money lenders’ answers:
- Some private lenders have lost money in the stock markets and are pulling back. More established ones are exercising caution as a means to mitigate losses and compensate for their lack of technology knowledge.
- While some hard money lenders have suspended operations, others have chosen to put a restriction on their lending parameters. As some of them rely on institutional capital that has been short on supply since the pandemic, they had to implement stricter or more conservative underwriting guidelines as part of their revamped lending process.
- Hard money lenders that have shut down were mostly undercapitalized. This has caused them to sell their notes to larger firms, since borrowers have also stopped funding. These larger firms, in turn, sell these loans to Wall Street, which caused lenders to lose the market.
- As real estate investors could no longer rely on private lenders to originate new loans, this rendered them incapable of financing their projects.
- Second market investors aren’t too keen on purchasing loans, given the lack of market liquidity. As a result, borrowers are faced with a higher cost of capital passed onto them by institutional and high-net-worth debt investors facing higher ROI themselves.
- A reduction in loan-to-value ratios is clearly present that made it harder to close loans. Rates are skyrocketing, particularly for more aggressive deals.
- Supply issues plagued the market which indicated a shortage of housing. Even if hard money lenders selling retail find this as a positive development, both lenders and investors are considering incalculable risk factors to adapt to the unpredictability of the situation.
Georges Franco, RevitaLending
While every crisis carries some degree of opportunity, the scarcity of institutional capital has forced a lot of hard money lenders to either suspend operations or curtail their lending parameters. This will correct itself eventually as consumer confidence begins to rise (with flattening curves, treatments, vaccines, etc.) and capital markets open up again.
However, hard money lenders who depend on institutional investors have had to make drastic adjustments to their underwriting guidelines. Under certain revised programs, borrowers need higher credit scores to qualify for funding, more money at the closing table for settlement, proof of previous experience, and elevated profit margins.
Gregg Mower, MAE Capital Mortgage Inc.
Some private lenders have pulled back and are waiting to see what happens with the COVID situation. Others have lost significant money in the stock markets and they are pulling back. But mostly, private money lenders are older so they have been more cautious and since they can’t go into bank lobbies, they have backed off due to lack of knowledge of technology.
Things are just different and for most, they are trying to figure out what oversights will come out of all this, as well as real estate investors who are worried about declining values. There is a lot going on but not much lending yet. It will come back as demand is still here.
Noah Grayson, South End Capital
The appetite of secondary market investors to purchase loans has diminished significantly. Lack of market liquidity has resulted in a higher desired ROI for institutional and high-net-worth debt investors, which is passing on a higher cost of capital to borrowers.
Additionally, market uncertainty has resulted in more conservative underwriting parameters, including restricted leverage, increased post-closing reserve requirements, higher debt service coverage ratios, and higher personal credit score requirements.
Chris Goulart, All California Lending
Loan-to-value ratios have been reduced due to the pandemic. Investors are getting choosier about the deals they want to fund, and properties/borrowers who depend on cash flow from rents are being scrutinized more than in the past. Rates are trending higher, especially for more aggressive deals.
It’s still possible to get a 75% deal funded, but a lot of the money going out right now is at more conservative levels. Fifty to sixty-five percent is more common.
Judy Robbins, California Hard Money Direct
Many private lenders, once the pandemic hit, decided to drop out of the lending arena. They cited the fact that they felt uncomfortable with the uncertainty of where the real estate market would be going. They wanted to sit on the sidelines long enough to ascertain when a better time to lend might be.
Other lenders tightened up their lending criteria. They lowered the loan to value, making it harder to close loans. Many of them are requesting six months of interest paid in advance. These changes have definitely made it harder to originate loans.
Mike Hanna, Investmark Mortgage, LLC
There are several negative impacts. Primarily, there is an unknown as to how this will impact values going forward and in what timeframe the value changes might occur. Understanding what loans make sense to do at this time is challenging. As of the end of April to the first week of May, there was a supply issue in the market indicating a shortage of housing.
While this is a positive for hard money clients selling retail, it’s what happens 90 days from now and/or 180 days from now that is unpredictable. This is causing both lenders and investors to consider risk factors that cannot reliably be calculated.
Jeremy Rehwald, Wildcat Lending LLC
Quite a few lenders have suspended operations or shut down companies altogether. These companies were undercapitalized and sold their notes to large firms like PeerStreet.
Wildcat Lending was well capitalized with plenty of credit facility capacity, which allowed us to thrive and close a record number of loans in Texas, Tennessee, and Ohio. Loan demand is still very high to this day.
Jack Miller, Gelt Financial, LLC
It has caused most lenders to stop funding and most sell their loans, as the buyers have stopped funding. Borrowers are also struggling to make payments and meet deadlines.
Since we have been in business since 1989, we have thought of this before. We don’t sell loans and are buying. But I think we are the exception.
Alexa Mizrahi, Lone Oak Fund
Many hard money lenders are funded from institutional sources of capital or bank lines. Without access to these funds, many hard money lenders are unable to make new loans. Lone Oak Fund is fortunate to have no leverage, no bank lines, and no institutional investors. We are able to fund new loans and continue business as usual.
Alex Bogumil, Capital Fundings, LLC
The capital markets supporting the private lending sector have paused, which meant most new loan originations have stopped. This has left many borrowers/real estate investors unable to finance their projects. Until investors are able to understand how housing values will be affected, new loan originations will sharply decrease.
Rob Barney, DHLC Mortgage, LLC
It depends upon the type of hard money lender. Many new lenders have been originating and selling their paper to firms that, in turn, sell the paper to Wall Street. These “New 20% Down” lenders have lost the market for the loans that they used to make, since the market for those loans has dried up.
What unexpected opportunities has the pandemic opened for hard money lenders?
Key takeaways from the hard money lenders’ answers:
- As institutional lenders have temporarily stopped operations, this has opened doors for private and hard money lenders to gain more customers as they are one of the very few sources with available capital.
- With limited players in the market, this allowed private and hard money lenders to choose their transactions very carefully, with preference on low-risk transactions, to be able to earn higher returns.
- Lenders have chosen to be strategic in their lending activities, employing prudent tactics such as increasing interest rates while lowering loan-to-value ratios, to stay competitive amidst an uncertain economy.
- Commercial lenders currently enjoy a slew of new customers needing funding for their new business ideas (e.g., online ordering and grocery delivery) that came about during the pandemic. Commercial lenders see a goldmine in these new businesses pursuing micro-fulfillment endeavors to meet the current demands of consumers.
- The pandemic has given lenders an opportunity to assess their operations and implement improvements to elevate customer experience. Lenders are looking into making their internal processes more efficient, adopting technology for borrowers, and strengthening relationships with investors.
- Due to the stay-at-home orders, investors have seen less competition in terms of buying and development opportunities. This has prompted them to be more aggressive in their borrowing activities, which gave hard money lenders the opportunity to set more appealing terms.
Georges Franco, RevitaLending
Lenders who fund deals with their own balance sheets (portfolio lenders) have seen an increase in business because, well let’s face it, they’re the only game in town. Narrowing the landscape has allowed these lenders to profit from the increased demand for their money.
A number of these lenders have increased their pricing (interest rate and points) and lowered their loan-to-value ratios. Raising pricing and reducing exposure are prudent moves as nobody knows for certain when the economy will rebound. In this business, elevated risk equals elevated price points.
Alexa Mizrahi, Lone Oak Fund
The hard money lending space became very crowded in recent years. It was challenging to compete with many lenders that were offering high leverage loans at relatively low cost. With less competition, Lone Oak Fund is able to be more selective and lend on low-risk transactions, such as apartment building purchases at 50% LTV.
Keith Pellicano, Edgeworth Lending
Opportunities have opened up in specific segments of the commercial lending market. The COVID-19 pandemic has accelerated the demand for online ordering, in-store/curbside pickup and grocery order delivery, and companies are exploring new fulfillment options for their products. One strategy: micro-fulfillment.
Noah Grayson, South End Capital
The exodus of conforming, non-conforming, and institutional lenders from the CRE space has left private and hard money lenders as one of the only remaining sources of available capital. This has enabled hard money lenders to be more selective in the transactions they choose to fund, and earn a higher return.
Wendy Sweet, Carolina Capital Management, Carolina Hard Money
We have seen an impact of course. We had a small slowdown, but we were the ones that backed off on our loan to value and the length of our loans. We went from 70% of the ARV to 65% of the ARV and shortened the term from 12 to 6 months. Houses are still selling; demand is still very high.
Jeff LaMotte, Val-Chris Investments
Hard money lenders have been a long time favorite for quick and easy business purpose loans and I don’t think that has changed. While many lenders have closed up shop or implemented a temporary hold on all lending, we have been busy filling the gap other types of lenders are afraid to fill.
Alex Bogumil, Capital Fundings, LLC
The time away from new originations has allowed lenders to look at their business and see how they can improve their borrowers’ experience. These improvements will be everything from internal process efficiencies, implementing new technology for borrowers, and building investor relations.
John Konakci, Capstone Capital Partners
Real estate investors seeking real estate buying/development opportunities have encountered less competition due to the stay-at-home orders. As a result, they have been more active and have sought hard money with more appealing terms for hard money lenders.
Gregg Mower, MAE Capital Mortgage Inc.
Those that are still lending can dictate what exactly they want borrowers to do and are getting better than normal returns. If you are willing to lend in this environment, you can set your terms and the borrowers will generally have to take them as the supply has been cut.
If you knew the impact of this situation on your business in advance, how would you prepare your business to mitigate your losses or even profit from it?
Key takeaways from the hard money lenders’ answers:
- Revisiting the effects of previous unexpected events can help lenders prepare for any similar situations in the future. The Great Recession, for instance, has taught some lenders to cut back on overhead expenses and invest in technology to enable a streamlined process.
- Lending companies that are able to react quickly will be able to implement measures that are needed to mitigate losses, such as tightening loan-to-value ratio and temporarily suspending lending on some risky projects.
- With discretionary capital in place, lenders will be able to finance deals originated by borrowers who are looking to take advantage of opportunities in the current market.
- Allotting resources on expanding referral partnerships is a step towards the right direction when thinking of gaining better credit transactions and stabilizing returns.
- Partnering with portfolio lenders who offer complementary products opens doors for more business opportunities despite the pandemic.
- As work from home becomes commonplace, adopting technology is necessary to allow business to continue. Lenders may offer online loan application and approval, as well as remote closing, and run the business with remote workers to curb office expenses.
- It is important to strengthen business structure and capitalization. With these in place, lending companies will be able to present an established image that can strongly support the investment community.
Noah Grayson, South End Capital
We anticipated an economic downturn at some point in the future after the Great Recession. We stockpiled reserves, reduced overhead, and invested heavily in automation and technology to streamline our process.
Our team has been working from home predominantly since 2009, as we never saw the benefit of incurring the expense of brick-and-mortar locations in a service-based industry. We’ve been conducting our operations almost entirely online or over the phone.
Additionally, we committed resources to expand our strategic referral partnerships, so that an increase in deal-flow would enable us to originate better credit transactions and stabilize returns in an impacted economy.
Andrew Abas, Carlyle Capital
I think we all felt that a maturing economy was in the making, but expecting a global pandemic that literally shut down the world is unprecedented. I don’t think anyone fully knows how COVID-19 will impact any business.
We have the assumption that real estate market values will tick down, and that borrowers (who are going through their own hardships) will lead to an increase in delinquencies. That said, Carlyle Capital continues to work with our clients to help them through this uncertain time.
Having discretionary capital has allowed us to continue to fund high-quality deals for borrowers that are capturing the current market opportunity.
Alexa Mizrahi, Lone Oak Fund
Lone Oak Fund is fortunate to have a dedicated IT team that enabled our employees to work from home as soon as stay-at-home orders were put in place. Lone Oak Fund invested heavily in proprietary software a few years ago for all platforms – loan origination, loan servicing, and investors.
The principals were ahead of the curve in implementing these systems years prior to the pandemic, which is remarkable in an industry that has generally lagged in adapting to modern work environments.
Georges Franco, RevitaLending
We would have begun to ring the bells sooner and instill a sense of urgency in our pre-pandemic messaging. Also, we would have sought partnerships with portfolio lenders who handle certain niche products that are complementary to what we currently offer. Lastly, we would have gotten more familiar with the video conferencing options for meetings, inspections, and sales presentations.
Jeremy Rehwald, Wildcat Lending LLC
We were blessed to go into this pandemic with the best business structure and capitalization possible. Loan demand never really slowed; only financing options. The key was to let the world know Wildcat Lending was still in business and there to support the investment community. We never tightened guidelines and/or made last-minute changes like many other lenders.
Barney Van Huss, Ellis Equity Lending
We are a niche lender and are able to react quickly. We tightened our loan to value ratio, and temporarily suspended lending on development land that is not already titled. Unfortunately, we stopped a three-million-dollar transaction in Colorado that is an excellent lending opportunity in normal times. Still a good deal for another lender.
Wendy Sweet, Carolina Capital Management, Carolina Hard Money
We were already prepared. We belong to some awesome mastermind groups and we practiced on this kind of black swan event. We hoarded our cash to make sure our investors were paid and temporarily furloughed our employees but put them back to work within 45 days.
Darren K. Proulx, Newmark Investment and Loan, Inc.
Certain borrowers in default have received relief from foreclosure during the pandemic. If I had seen the situation was coming, I would have initiated a few foreclosures to beat the cut-off.
Marli Welgemoed, New Silver
New Silver already offers online loan application and approval, but if we had known, we would have introduced remote closing as an option.
What marketing channels do you prefer to use during the pandemic over the rest and why?
Key takeaways from the hard money lenders’ answers:
- Keeping in touch with previous clients is a time-tested marketing approach that will serve lenders well in the time of pandemic.
- It is important to keep an established referral base, composed of satisfied customers, brokers, and other lenders, which can help boost marketing efforts.
- Word of mouth, phone calls, and referrals remain effective methods for gaining new customers, especially when involved in hard money deals.
- While traditional methods for marketing stand the test of time, lenders should be able to ride the waves of technology by integrating digital tools like social media platforms, email campaigns, and SEO-related efforts to take advantage of a market that spends more time on smartphones now than ever before.
- Updating newsletters is a smart marketing approach to provide industry-related information that investors will find useful.
- Company websites, Google Adwords, and Craigslist help generate leads. Creating educational videos, on the other hand, can also help gain new customers.
- Local REIA groups remain good sources of customers, especially when lenders need to strengthen their position in the local markets they serve.
Barney Van Huss, Ellis Equity Lending
We have an established referral base from satisfied customers, other lenders, and brokers. We do very little marketing other than a newsletter every couple months about recent deals funded. Due to COVID-19, our third-party contractor for marketing is not working, so no mailouts for a while.
Georges Franco, RevitaLending
Marketing-wise, our approach has remained relatively the same. We maintain contact with previous borrowers, send out email campaigns, try to maximize our SEO efforts, and submit articles to various local publications when we can.
Jeff LaMotte, Val-Chris Investments
Digital. It’s still the easiest and most cost-efficient way to reach as many people as possible. Regardless of the current economic stability or strength, people will continue to carry their smartphones and check their emails daily.
Dean Tilman, Paces Funding
I’ve been a direct hard money lender since 2005, so I have a lot of word of mouth and referral business. I don’t have to market very much. I send email blasts and occasionally look at social media opportunities.
Marli Welgemoed, New Silver
We continue to publish posts on social media to keep brand awareness high, as well as retargeting our newsletter to contain market-related news and valuable resources to real estate investors.
Alexa Mizrahi, Lone Oak Fund
Lone Oak Fund continues to rely on existing relationships with mortgage brokers. Loan officers have been marketing through personal emails and phone conversations.
Mike Hanna, Investmark Mortgage, LLC
We are continuing with our online strategy, as we are heavily invested in it, and it makes the most sense given how investors are primarily connecting during this time.
Chris Goulart, All California Lending
Most of our marketing comes from referrals and past clients. New clients may find us online – either directly through our website or through an article we’ve written.
John Konakci, Capstone Capital Partners
For hard money deals, word of mouth and referrals are still the most effective channels to use. Our company website is also a source of leads.
Loren Howard, Prime Plus Mortgages: Hard Money Lenders
Facebook. We like to share and signal what we are looking on, what we are funding, and what the latest real estate trends are!
Ken Walker, Sun Pacific Mortgage & Real Estate
Email marketing. It’s efficient, safe, and is read especially by those who you are already connected with.
Gregg Mower, MAE Capital Mortgage Inc.
We still rely on our website to generate leads. I also have had luck with Craigslist and Google Adwords.
Wendy Sweet, Carolina Capital Management, Carolina Hard Money
We are doing a lot of live educational streams. Our website is also a strong pull for us.
Mike Fallot, MM Lending LLC
We continue to market primarily through local REIA groups in the markets we serve.
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