Private money lenders or hard money lenders exist to serve typically underserved markets in the real estate industry. Those markets range from potential homebuyers who are having difficulty getting residential loans from banks to investors and commercial entities seeking bridge loans. However, given the number of players in private money loans today, underserved may not be the right word.
The Housing Crisis Effect
As the housing crisis bottomed out in 2008, some of the largest institutional investors in the U.S. used the crisis as an opportunity to snatch up foreclosed homes at bargain prices. Fast-forward to 2015 and we find these large investment firms still have significant home inventory as both rental properties and distressed properties ripe for rehabilitation and eventual sale. It was a logical progression for these large financial firms to get into the private money-lending market to finance home-flippers and other small-scale property investors—and so they did.
The entry of these larger firms into the market has put enormous pressure on local private loan companies, who must compete with larger national groups that have deep pockets and access to cheaper capital. It’s analogous to Wal-Mart moving into town and squeezing your hometown hardware store.
Favorable Borrower Market
As a borrower, this increased supply of private money lenders works to your advantage. Competition drives prices down in any market, and the hard money market is no different. Interest rates are still higher than a traditional bank loan, as they must be to reflect increased risk, but the downward pressure caused by the increased number of lenders is causing a significant drop in interest rates.
For potential first-time homeowners, it’s a perfect time for competitive interest rates to purchase a home. For home flippers, it is also a great time to buy if you can find a property to improve. The current supply of homes is sparse in California, running below 3 months inventory—well below the 6 months of a balanced market. The California market is in desperate need of affordable housing, and new home construction is not keeping pace within the affordable housing niche. Renovation and/or flipping can help to plug the gap.
Combine these facts with the recent report from the California Association of Realtors showing that families with average income can’t afford a home in 25 of 32 California counties, and the premise is reinforced. Californians earning the median income of $60,244 can afford less than a third of the available homes for purchase. Private money loans can provide a potential conduit to solve this problem through increasing home inventory through renovations by financing home flippers, and lower interest rates can expedite the process.
Advantages of a Good Private Money Lender
How can private money lenders distinguish themselves in this highly competitive market? The best way is through superior service and other intangibles. A lender that has years of experience and is more familiar with the nuances of the local real estate market generally will be more willing to work with you and find a creative solution for your project. Additionally, a good private money lender can reduce loan fees and be more efficient in the loan process generally which can benefit you, for example, by meeting tight escrow deadlines or improve the chances of your offer being accepted by the seller.
Larger institutional lenders operating in the private money loan space will most likely be prone to the same sort of bureaucracy and slow inertia that makes securing a traditional bank loan difficult at best. They may also apply national standards to a localized market. An experienced local private money lender is in a better position to assess risk and may be able to extend a larger loan and accept a higher LTV mark.
At Val-Chris Investments, we pride ourselves on our service and knowledge of the California real estate market. If you are in need of a private money loan for either residential or commercial purposes, please contact us today. We would be happy to show you how our insight, expertise, and experience in the California real estate market can help you acquire the money that you need, in the right amount, and at the right time.