When you read the above headline, your first thought was probably that the Rules of Thumb blog from MoneyThumb was going to deliver bad news. The opposite is true. In fact, according to a survey of over 2000 active hard money lenders conducted by Real Estate Bees, despite the negative impact on their business caused by the COVID-19, more than 80% are seeing new opportunities opened by the pandemic.
Since the majority of hard money loans are issued to those in the real estate industry, we turned to an expert in the niche who provides a wealth of information as a result of a survey they took of hard money lenders. Real Estate Bee reached out to private money lenders from all 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. An in-depth report and the results of that survey with questions asked and answered, along with a Q&A segment with industry professionals, can be found here.
The report is divided into the following two parts.
1. Multiple choice questions where hard money lenders 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?
The responses to the first part of the survey, the multiple-choice questions, are reported in graph form, making it easy to see how the results stack up. Below are a few key takeaways from the responses of professionals to the open questions.
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 technical 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.
What unexpected opportunities have 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 a preference for 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 the 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.
There are many hard money lenders who read the Rules of Thumb blog from MoneyThumb and use our proprietary product, PDF Insights. We hope those readers have gained a lot of helpful knowledge from this post and the survey from Real Estate Bee. Please share this post with your peers in the hard money industry.