Three Challenges Faced By Today's Private Money Lenders And How To Weather Them

Post written by

Noah Brocious

Noah Brocious, President, Capital Fund 1, Reliable Private Money for your Real Estate Projects www.CapitalFund1.com Scottsdale, AZ USA

Since the Great Recession, a well-known downturn in the real estate market across the country, the private money lending industry has significantly evolved. Prior to 2008, I remember when private mortgage lending was dominated by several very large companies —  Mortgages Limited, IMH Capital, and Landmark Capital & Investment Company, to name a few. Along with these big players, a few small mom-and-pop shops were sprinkled in and managed to compete on a small scale.

Back then, due to simple supply and demand, private money lenders were able to charge higher rates and fees because there was a high demand for money and very low supply. Fast forward to today when it seems like everyone wants a piece of the industry. The mom-and-pops still have a very healthy market share, but Wall Street has paid notice to the above-average, risk-adjusted yields that can be generated and has begun participating (via institutional groups) by setting up their own shops, buying notes from groups that are originating, or by buying established private money companies like the purchase of Genesis Capital by Goldman Sachs.

As the industry continues to evolve, how will this shift affect the average lender? I foresee three main challenges.

The Urge To Compete

As more capital enters the space leading to lower yields, the competition factor could pressure lenders to feel they have to become more aggressive and write loans at higher loan-to-values. My advice? Fight the urge to compete aggressively by adjusting your loan parameters to accommodate higher loan-to-value situations. Stay conservative and stay in business.

Real estate is cyclical.

In 2010, after the new homebuyer tax credit came to an end, there was a very small double dip in real estate market prices and values. Other than that, values have steadily improved from 2009 to today. What does this tell us? We know there will be a correction at some point in the near future. We just don't know when or how bad it will be. Forewarned is forearmed.

A Dynamic Economy

There are many signs that point to a recession as early as 2020-2021. Most economists predict this one will be short and shallow, but only time will tell. So since there are no crystal balls, keeping a close eye on these indicators could help you "read the tea leaves.” When issues do arise, the smart groups will adjust their underwriting standards to be more conservative (not less). A final thought? It will be important not to overreact to every tiny bump in the road.

With these challenges as looming realities, I believe the solutions to overcoming them are as follows:

Make a plan and stick to it. Bear Bryant once said, "It's not the will to win that matters — everyone has that. It's the will to prepare to win that matters." If you don't have a plan and prepare, you’re destined to fail.

Outwork the competition, and stay one step ahead. This holds true no matter what the market conditions are, but especially when there is increased competition. Not all companies will prosper, or even stay in business, but the ones that put in the time and energy will have the best chance of surviving.

Pay close attention to economic indicators. Real estate, like any industry, can be affected by the larger economy. Keeping an eye on factors that might tip off troubled waters in the future could help your lending institution forearm yourselves against an upcoming downturn in the market. Smart groups will adjust their underwriting standards to be more conservative during these times, not loosen them to chase a changing marketplace.

The best advice I can give newer private lending institutions is this: When competition increases and you’re tempted to bend your underwriting standards to make more aggressive, higher loan-to-value loans in order to maintain market share, stick to your plan. As enticing as an instant gain in business might be, companies that stick to their guns and stay conservative will be in a much better spot when a real estate correction hits. These are the groups that will have a much better chance of making it.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
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Since the Great Recession, a well-known downturn in the real estate market across the country, the private money lending industry has significantly evolved. Prior to 2008, I remember when private mortgage lending was dominated by several very large companies —  Mortgages Limited, IMH Capital, and Landmark Capital & Investment Company, to name a few. Along with these big players, a few small mom-and-pop shops were sprinkled in and managed to compete on a small scale.

Back then, due to simple supply and demand, private money lenders were able to charge higher rates and fees because there was a high demand for money and very low supply. Fast forward to today when it seems like everyone wants a piece of the industry. The mom-and-pops still have a very healthy market share, but Wall Street has paid notice to the above-average, risk-adjusted yields that can be generated and has begun participating (via institutional groups) by setting up their own shops, buying notes from groups that are originating, or by buying established private money companies like the purchase of Genesis Capital by Goldman Sachs.

As the industry continues to evolve, how will this shift affect the average lender? I foresee three main challenges.

The Urge To Compete

As more capital enters the space leading to lower yields, the competition factor could pressure lenders to feel they have to become more aggressive and write loans at higher loan-to-values. My advice? Fight the urge to compete aggressively by adjusting your loan parameters to accommodate higher loan-to-value situations. Stay conservative and stay in business.

Real estate is cyclical.

In 2010, after the new homebuyer tax credit came to an end, there was a very small double dip in real estate market prices and values. Other than that, values have steadily improved from 2009 to today. What does this tell us? We know there will be a correction at some point in the near future. We just don't know when or how bad it will be. Forewarned is forearmed.

A Dynamic Economy

There are many signs that point to a recession as early as 2020-2021. Most economists predict this one will be short and shallow, but only time will tell. So since there are no crystal balls, keeping a close eye on these indicators could help you "read the tea leaves.” When issues do arise, the smart groups will adjust their underwriting standards to be more conservative (not less). A final thought? It will be important not to overreact to every tiny bump in the road.

With these challenges as looming realities, I believe the solutions to overcoming them are as follows:

Make a plan and stick to it. Bear Bryant once said, "It's not the will to win that matters — everyone has that. It's the will to prepare to win that matters." If you don't have a plan and prepare, you’re destined to fail.

Outwork the competition, and stay one step ahead. This holds true no matter what the market conditions are, but especially when there is increased competition. Not all companies will prosper, or even stay in business, but the ones that put in the time and energy will have the best chance of surviving.

Pay close attention to economic indicators. Real estate, like any industry, can be affected by the larger economy. Keeping an eye on factors that might tip off troubled waters in the future could help your lending institution forearm yourselves against an upcoming downturn in the market. Smart groups will adjust their underwriting standards to be more conservative during these times, not loosen them to chase a changing marketplace.

The best advice I can give newer private lending institutions is this: When competition increases and you’re tempted to bend your underwriting standards to make more aggressive, higher loan-to-value loans in order to maintain market share, stick to your plan. As enticing as an instant gain in business might be, companies that stick to their guns and stay conservative will be in a much better spot when a real estate correction hits. These are the groups that will have a much better chance of making it.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

Noah Brocious, President, Capital Fund 1, Reliable Private Money for your Real Estate Projects www.CapitalFund1.com Scottsdale, AZ USA...