At the REALTORS Conference & Expo in San Diego last month, lenders and government officials on a panel called “Commercial Lending and Financing: The Ever-Changing Landscape” discussed local trends policy and technology that could change the way deals are funded in the near future. Although held in San Diego, the discussion at the exposition spanned California as a whole and its predictions are as true as ever.
Here they are:
More Complete Data
Until now banks had the upper hand. This is one of the observations of Tom SEO of TechCrunch.com who commented on JP Morgan’s partnership with OnDeck Capital, an alternative lending company, earlier this month. The news impacted the banking world, as evidenced by a 28% single-day spike in OnDeck share price and has long-term implications for alternative lenders – of which hard money lenders are a core part.
The partnership scared many private lenders into worrying that major banks may be thinking of stepping into their domain. One of the reasons that this worries private lenders is the hold that traditional lending institutions have over data. Banks collaborate with one another and have access to troves of data that private hard money lenders lack. These include the years of experience and libraries of accounts, spending, and risk data. They are therefore able to underwrite credit with more predictive certainty and confidence.
These data resources have been hugely helpful to banks and other conventional lending institutions since it helps decision-makers evaluate risks and decide whom to accept as clients. Banks have been less likely to suffer from defaults than alternative private, bridge, or hard money lenders who fork out funds from their own pockets and have no such extended collaborations or databases to fall back on.
But the advent of the internet has caused the situation to change and access to discrete information is improving as technology picks up its pace. Google has been kind to commercial private lenders. Online databases now provide troves of background information on almost all aspects of a person’s life: Embarrassing to borrower but critical to lender. The lender (or almost anyone for that matter who knows how to research and is willing to pay for results) can poke into almost all corners and pick up data that an individual may not want to disclose. Elizabeth Braman, CCIM, chief production officer at real estate crowdfunding platform Realty Mogul.com, noted that these databases can also help lenders predict trend lines for future valuation purposes, rather than relying strictly on appraisals, which tend to use backward-looking data to determine value.
Braman also predicted that over the next five or so years, the increase in the amount of this data will make alternative lending far more convenient for lenders and borrowers alike. Why for borrowers? Perhaps it will make the process go that much faster and more convenient. Lenders will also be able to put checks in place and structure the borrowing process accordingly.
The lack of data has sometimes caused lenders to accept people who were unable to meet their obligations. Sometimes this was due to underestimating the demands of the system, underestimating their income or incompletely appreciating the scope of their obligations. Unfortunately, results have toppled into defaults, lawsuits, and lender and borrower suffering fiscal, psychological, and work stressors. Access to more complete and correct data should alleviate and prevent a lot of these problems.
An increase in the amount of available data will also make it easier for borrowers to provide data to lenders, because much of it will be coming directly from sources such as commercial transaction databases that include CoStar.
The flip side to this situation (doesn’t everything attractive have a flip side?) is an associated increase of security risks that accompany increased data in the commercial lending sphere.
The best one can do, the REALTY San Diego Exposition cautioned, is to mitigate, rather than eliminate, risk. Lenders and borrowers will want to be careful with the information that they put out there. Says Braman, “Be careful. Don’t put anything out there that’s not required.”
More Lending Options
The private lending market is growing. Becoming a hard money lender is enormously exciting but also risky. The lender needs to have access to troves of money to attract and fund investors. Few, naturally, have those deep pockets. So what do new and upcoming hard money lenders do? They pair up with someone who has the funds. These may be organizations, individuals, or some other sources of income. Federal and commercial regulations in California during the last year has made it harder for some private lenders to find these investors. It has become particularly hard for new and emerging investors to find brokers willing to partner with them. Regulations have made the field less attractive to fund and rising prices have keened private lending rates. Both together have decreased the spate of clients particularly since one of the few attractive points of private money lending is the rapid turnaround and convention paperwork. TRIDS and other regulations that slow the work curbed that.
On the other hand, there are enough crowdfunding companies who are happy to be represented in commercial deals particularly in California. That this is so was amply demonstrated at the convention where a large part of those present mentioned their interest in funding private lending companies or individuals. Commercial construction in California is on the upswing. It is expensive to invest in this kind of property, but many investors have been gratified by yields. There are still plenty of prospective buyers particularly from foreign countries (and curiously enough from NY) who apply for such deals.
The greatest interest in investments in the largest cities such as LA seem to be in Class A commercial space although there are still crowdfunding opportunities for Class B and C properties in parts of LA and in California’s less popular cities. Crowdfunders (at least as demonstrated by convention) look more at the market experience of the private lender in making their choice rather than in market conditions. Quality of property, federal/ consumer protection regulations or gloomy predictions are less apt to intimidate them if they are confident that their lender is a market expert who can accurately predict how a development will shake out in the long run.
So if you’re a skilled lender who has been lucky enough to hit it big in the history of real estate, you are that more likely to find financiers who will take their bet on you and collaborate with you.
Growth in the Small Business Environment
A survey conducted by the National Association of Realtors in the beginning of last month (November 2015) showed that the best prospects in commercial applicants come from small business and entrepreneurs. This is because banks in California have become more chary in funding them as a result of growing defaults over the last years. Corporations and established companies are more likely to receive loans than the unfamiliar owners or new-on-the-scene ambitious entrepreneurs. This is where hard money lenders step in and are more likely to get their clients.
So hard money lending (otherwise known as private or bridge investing) is a sector that is all but growing by leaps and bounds. It seems to be future of consumer funding in California as the state becomes more entrepreneurial-minded (maybe more out of necessity than out of desire). A by factor is that demand for office space is growing.
Said Braman “I know the rest of your REALTOR friends believe the American dream is owning your own home. But I think in the 21st century the American dream will be running a business and owning your own home.”
And where is this money going to come from but from commercial hard money lenders... The future may have challenges but on whole it looks good…