In Episode 019 of the Scotsman Guide Author Showcase, Carl White interviews Ryan Walsh of Hard Money Bankers about his article, “Find Ways to Adapt” in the October 2023 issue of Scotsman Guide Commercial Edition.

Ryan Walsh is a managing partner at the Greater New York City-based Hard Money Bankers and is an entrepreneur of multiple successful companies. He originally used private money to expand his own enterprise, then realized the importance of private money for growing businesses more quickly and easily.

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Whether the destination is a tourist’s dream, a metropolitan area on the rise or a country experiencing major growth, commercial mortgage brokers need to know that leveraging the assistance of a private lender can give motivated clients an edge in affluent markets around the globe. In fact, it’s precisely the in-demand nature of these markets that makes private lending an excellent option for investors, rather than a backup option if a traditional lender falls through.

“For even the wealthiest borrowers, using one’s own money to fund a real estate purchase is risky. They would rather invest their money in other ways.”

Direct private lenders bring three distinct advantages to the table in competitive, wealthy real estate markets. These include speed to closing, flexible deal terms and fewer regulatory controls. Opportunities in affluent real estate markets can move fast. This is influenced by the popularity of the market (i.e., the sheer number of investors who want to plant their flag) and the scarcity of property in some smaller locations.

When there’s a long list of interested buyers putting together offers, becoming one of the first who can get to the table and close the deal is of utmost importance. Although traditional lenders may have few qualms about approving a loan for property in a popular, high-end locale, they still need months to work through their own red tape. Private lenders, however, can meet this need for speed with the resources and skill set to close in as little as a few days.

Private partners

Even in hot real estate markets, traditional lenders may only be willing to fund a certain deal type. These deals need to meet the bank’s strict internal criteria for use, inspections and other quotas.

Such internal criteria may often rule out opportunities to acquire properties such as raw land — real estate that’s extremely valuable within the context of an affluent market but will not pass muster with a traditional lender that has a blanket policy against land loans. This is especially true in international markets, where traditional lenders will rarely work with borrowers on any type of property, let alone raw land.

Private lenders, on the other hand, have flexibility built into their business models. They can take a step back and examine the merits of a deal in a way that traditional lenders may not be able to. Private lenders will take into account the quality and affluence of the market when evaluating a potential opportunity. Plus, they don’t have arbitrary, internal policy-driven limits that may fund a loan for one borrower and not for another. Simply put, the chances of obtaining the funding needed are higher when partnering with a private lender.

For even the wealthiest borrowers, using one’s own money to fund a real estate purchase is risky. They would rather invest their money in other ways. Instead, they go to private lenders for bridge loans to fund their real estate deals while they pursue other funding sources. Private loans give borrowers confidence that they’re making smart investments with a layer of protection.

On top of that, specialized private lenders are highly experienced in navigating the real estate laws in many foreign countries. Borrowers thus get both financial and regulatory security when they seek funding from these private lenders. This combination, including the faster approval processes when compared to traditional lenders that take months to decide, makes private lenders the go-to sources for investors planning to enter foreign markets.

Caribbean islands

Wealthy foreign real estate markets present a multitude of opportunities for mortgage brokers and their clients. Some of the most breathtaking landscapes — and most coveted real estate — can be found throughout the Caribbean.

Driven by the region’s pristine location and the exclusivity created by its wealthy enclaves, Caribbean countries have vibrant economies that are fueled by the global tourism industry. The islands offer limited inventories of real estate due to their sizes, resulting in premium prices that can reach seven or eight figures for the best locations. This growth isn’t expected to slow down anytime soon either.

One example is the French territory of Saint Barthelemy, better known as St. Barts. Property ownership opportunities are highly sought after on this small island that covers about 10 square miles. The limited space and unique surroundings have fueled the interests of international buyers, driving up the premiums that investors are willing to pay for their own piece of paradise. Villas can cost more than $5 million throughout the island, with the most exclusive beachfront properties easily fetching quadruple the price.

Another popular Caribbean destination is St. Maarten, an independent constituent country with ties to the Netherlands. At just over 13 square miles, St. Maarten presents many of the same opportunities and challenges as St. Barts when it comes to exclusivity and availability. The island continues to attract many of the world’s wealthiest people. This presents an opportunity for both residential and commercial investments. For instance, some Guana Bay villas with ocean views can cost as little as $1 million, whereas luxury cliffside compounds can go for $20 million.

The Cayman Islands, a British overseas territory, boasts one of the highest standards of living in the Caribbean. Developed and raw-land investment opportunities abound in this trio of islands. It’s one of the fastest-moving real estate markets in the Caribbean and a corporate magnet due to its status as a global tax haven. The country levies no income tax, capital gains tax or corporate tax. The largest number of offshore companies in the Caribbean region are registered here.

South America

Investment opportunities in several South American countries also continue to attract attention. These include Brazil, where high-end properties in major cities such as Sao Paulo and Rio de Janeiro are multiplying fast, with a particular interest in luxury apartments in both cities.

For instance, the luxury and ultra-luxury apartment sectors in Sao Paulo expanded quickly in the first nine months of 2021, with sales more than doubling compared to the same period in 2020. In Rio de Janeiro, the luxury home market has grown by 200% in the past five years. Combined with a relatively competitive market and an appetite for new construction, these growing cities are attracting investors from around the world.

Although Peru isn’t the wealthiest country in South America, its real estate market has been on the rise. In 2021, new home sales in the Peruvian capital of Lima were up 44% year over year. With a population of 11 million, Lima is among the largest cities in the Americas, and the demand for residential and commercial real estate continues to grow as a result. The nation has a growing population and a housing deficit that can benefit from foreign investment. Peruvian legislation has allowed for infusions of foreign capital to help fuel growth.

Northern neighbor

While Canada might not be the first country that comes to mind when thinking of real estate investment hot spots, our neighbors to the north have proven to be a popular location for cross-border buying sprees. The country’s high standards of living, economic diversity and stable political climate have attracted new residents and flourishing business opportunities.

Cities such as Toronto and Vancouver continue to grow, creating opportunities for investors to build new housing and commercial properties. Sales of all types of housing in Vancouver — a hotbed for tourism, the entertainment industry and the technology industry — rose by 23% year over year in August 2023.

Rents for a one-bedroom apartment in Toronto, the wealthiest city in Canada as measured by the number of high net worth individuals, have grown by 40% in recent years. Additionally, Canada does not have residency or citizenship requirements to own property, making it easy for U.S. investors to access the market.

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Affluent markets around the world offer opportunities for commercial mortgage brokers to help clients expand their business operations. Private capital can serve as a game-changing entry point into these exclusive investment arenas. In a competitive land and property market, the flexibility and speed that a private lender brings to the table can make all the difference between getting the deal done and missing the boat. ●

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While the future remains murky, there are still issues that may shape the economic landscape going forward and offer opportunities for commercial mortgage originators. When confronted with an environment characterized by rate hikes and economic turbulence, it becomes essential for professionals in this field to adapt and strategize effectively. Remaining well-informed about economic trends, policy decisions and real estate market dynamics is crucial.

Changing landscape

Rising interest rates have presented major issues for the commercial real estate industry. Affordability concerns, decreased property valuations and headwinds for new developments have contributed to a more challenging investment landscape.

Shifting preferences toward alternative investment options, and strains on cash flow and financing efforts, have further compounded the challenges faced by real estate investors in a higher interest rate environment. It is crucial for originators and their clients to carefully analyze market conditions, evaluate the potential impact of interest rate fluctuations, and adapt their strategies to mitigate risks and maximize returns in the current climate.

The commercial real estate industry relies on lending services to keep the market moving. Traditional lending institutions such as banks and credit unions play a vital role in providing individuals and businesses with the necessary capital to purchase properties for both residential and commercial purposes. But due to the recent and drastic increase in interest rates, the landscape of commercial mortgage lending is undergoing a transformative shift, especially for traditional lenders.

When interest rates rise, it becomes more expensive for individuals and businesses to finance real estate purchases. The expected result is that the demand for properties should decrease, leading to a decline in property valuations and creating a buyer’s market across the board.

While this scenario has occurred in some areas of the country, buyers may be more hesitant to invest in real estate, which can also contribute to a slowdown in the market and put downward pressure on property prices. This situation can present challenges for existing real estate owners, who may have trouble selling their properties at desired prices or face declines in the values of their investment portfolios.

Real consequences

Higher interest rates have had a significant impact on new real estate development projects as well. Developers often rely on financing from banks and other sources to fund their projects.

As interest rates increase, borrowing costs for developers rise, making it more expensive to secure financing. This has resulted in a slowdown in new construction, fewer new projects being initiated and a potential decrease in the housing supply. A decline in real estate development activity can further exacerbate the issue of housing affordability and limit investment opportunities.

In a rising interest rate environment, some investors may opt to shift their money away from real estate and toward alternative options. Higher interest rates can make other investment vehicles (such as fixed-income securities, bonds or money market funds) more appealing due to their comparatively lower risk and potentially higher returns. This shift in investor preferences, especially when private money is involved, is reducing real estate activity and leading to a slowdown across many markets.

Foreclosures are also on the rise. Borrowers with variable-rate mortgages are experiencing an increase in their monthly payments. This can put pressure on cash flow, particularly if rental income remains stagnant or does not keep pace with the rising costs to borrow. Investors are reassessing their business strategies, but for some it may be too late if they can’t get the increased rent to mitigate the impact of a higher interest rate on their cash flow.

One of the key factors that influence future economic expectations is the likelihood of further rate hikes. Central banks around the world, concerned about inflationary pressures, are expected to continue tightening their monetary policy. This could lead to increased borrowing costs for individuals and businesses alike, with potential impacts to consumption and investment activities.

While rate hikes may help curb inflation, they also pose risks to economic growth and financial stability. The possibility of a minor recession remains a topic of discussion among economists. While recessions are a natural part of economic cycles, their timing and severity are uncertain. The concerns stem from factors such as geopolitical tensions, trade disputes and structural vulnerabilities within certain business sectors. But it’s important to note that economic forecasts are not infallible, and the resilience and adaptability of economies can often defy expectations.

Potential solutions

Next year promises to be filled with many of the same uncertainties, challenges and opportunities. The prospect of further rate increases and the potential for a recession are ongoing concerns. Whether or not rate hikes and economic turbulence continue, it remains essential for commercial mortgage originators to adapt and strategize.

Understanding current economic trends, policy decisions and market dynamics will be crucial. Follow reputable sources of financial news, attend industry conferences and engage with professional networks to gain insights. By staying ahead of the curve, originators can anticipate changes in interest rates, lending policies and market conditions. This knowledge equips them to make informed decisions and adapt their strategies accordingly.

For some mortgage brokers, this change can seem quite daunting. The reality is that these shifts are usually the best time to grow your business for the future, as it’s all about capturing market share right now. Sales are currently down in terms of volume, but they won’t stay that way forever.

Originators need to get their names in front of customers now more than ever. Instead of pulling back on marketing expenses, try doubling or tripling your lead-generation efforts and budget. Get creative and find ways to be in front of people. If originators aren’t brainstorming for at least an hour a week about how to connect with new or existing customers, they aren’t putting enough effort into marketing.

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Many potential investors are sitting on the sidelines or waiting for good deals. If the name of their originator is not the first thing an investor thinks of when they’re ready to get back in the game, then these originators have done themselves a disservice. This is the time to reengage any contacts from the past. Follow-ups, check-ins, and genuine care for past clients or potential customers can keep the pulse of your business going.

When COVID-19 struck, real estate agents and originators had to change and find new ways to meet their clients’ needs. Something similar is happening today. Even as liquidity in the market shrinks, there still are deals being funded. Make sure you’re the one funding them. ●

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Hard money loans, also known as bridge loans, are short-term funding solutions for commercial or investment properties. The money doesn’t come from banks or other traditional lenders but rather people or private companies that accept real property as collateral.

“Brokers need to be cautious due to the lack of regulation within hard money lending. While this allows for fast dealmaking, it also means that the industry is under less scrutiny than other lending sectors.”

The community of commercial mortgage brokers is the largest source of leads for hard money lenders. Mortgage brokers frequently recommend hard money loans to clients who seek capital for homes and businesses. They also serve as excellent referral sources because they connect with many borrowers and real estate agents.

Hard money loans offer both challenges and solutions that mortgage brokers need to be aware of. While these lenders can fund deals much more quickly than traditional institutions, they typically charge higher interest rates and are not subject to the same level of oversight as banks or credit unions. These are just some of the numerous aspects of hard money that mortgage brokers need to know.

Fast and flexible

One of hard money’s main benefits is the speed with which a loan can be approved and funded. In many circumstances, hard money loans can be approved in as little as a couple weeks — and sometimes even faster. The hard money lender will consider the cash-flow ability of the property, the amount of equity the borrower will have in the property, and the borrower’s prior experience.

The lender will also consider the borrower’s exit strategy and whether they have sufficient cash reserves to make on-time loan payments each month. Providing that everything in these categories checks out, they are likely to approve the loan request.

The speed of this funding channel has saved many mortgage brokers who needed rapid financing resources for their clients. The accelerated procedure allows for quicker results and empowers brokers to successfully serve time-sensitive prospects.

In contrast to banks, hard money lenders don’t have to deal with many regulations and other requirements. They focus on borrowers who have adequate equity in their properties, enough money on hand to cover the monthly payments, workable exit strategies and appropriate expertise in these deals. Hard money loans are a handy tool for mortgage brokers who wish to serve a broader spectrum of clients, due to the lenient standards that allow borrowers with poor credit or unusual income sources to be approved.

Hard money downsides

Hard money loans offer a lot of flexibility, but this comes at a price. Interest rates will always be higher than those for traditional loans. Hard money lenders take on more risk by granting the borrower the comfort of fast access to financing for their real estate venture. In this light, too, borrowers may find it more costly to repay the loan due to adjustable interest rates, which may restrict their choices or reduce the earning potential of their real estate holdings.

Hard money loans tend to have lower loan-to-value ratios (LTVs) than traditional bank loans. A hard money loan may offer an LTV of 50% to 75%, whereas a traditional loan may have an LTV of 80%. These loans are specifically designed to be short term in nature and generally last anywhere from six to 18 months.

A short-term loan can put pressure on the borrower, especially if there is a disruption in their original business plan. The quick maturity is why hard money loans are often used by borrowers who intend to relist their investment property as soon as possible.

Things to consider

Before submitting an application for a hard money loan, mortgage brokers need to know the value of the property in question. As already discussed, real estate serves as collateral for a hard money loan and the value of the property will help determine the maximum size of the mortgage.

Brokers need to be cautious due to the lack of regulation within hard money lending. While this allows for fast dealmaking, it also means that the industry is under less scrutiny than other lending sectors. Brokers must investigate each lender thoroughly to verify their reputation and to understand all of the paperwork involved. Don’t be afraid to ask the lender for referrals to past clients.

Brokers also must consider elements such as the property’s location, price volatility and the possibility of future growth in value. Determine the borrower’s capacity to oversee the property or effectively carry out their investment goals. Ensure that your client is at ease with the associated degree of risk by carefully evaluating the possible dangers.

In addition to hard money lenders, investigate all possible funding options. Be sure to look into banks, credit unions and other capital sources to make sure you have found the right lender for your client. Weigh the advantages and disadvantages, and assess the eligibility requirements of multiple options.

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The success of hard money lending begins with the mortgage broker, who needs to structure deals around the needs of their client. By collaborating, brokers and hard money lenders can reassure borrowers that they’ll be able to find an answer, regardless of whether the request involves a temporary loan to pay off a maturing loan, money to finish a fix-and-flip project or financing for new construction. ●

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“While a price premium will be paid, there are many reasons that a broker would advise their borrower to consider a private lender. These include a quicker approval and funding time frame.”

This type of news can leave mortgage brokers scratching their heads as they try to figure out how to best adapt to a changing market. Sometimes overlooked by brokers is the fact that strategic relationships with private lenders may become the new standard, both as a reliable lending source and a way for brokers to diversify their own investment portfolios.

Private lending explained

Private lending refers to a type of mortgage financing in which individuals or private companies lend money to borrowers rather than traditional institutions such as banks or credit unions. Instead of having a fixed interest rate or terms as bank loans do, the terms of private loans are negotiated directly between the borrower and the lender. This can provide greater flexibility for the borrower in terms of the leverage, interest rate, repayment schedule and collateral.

The use of private lending sources can be beneficial to commercial mortgage brokers whose clients may not qualify for traditional bank financing for a variety of reasons. While many banks and other conventional lenders have stringent guidelines — e.g., minimum debt-service-coverage ratios or seasoning requirements — private lenders tend to be extremely flexible and often provide loans that banks would not typically fund.

Brokers choose to work with private lenders for a number of reasons, including when there is a short time frame to close, the property is in distress or the borrower has a lower credit score. To compensate for their flexibility and greater risk tolerance, private lenders charge higher interest rates (commonly between 10% to 12%) than traditional lenders.

Costs vs. benefits

While a price premium will be paid, there are many reasons that a broker would advise their borrower to consider a private lender. These include a quicker approval and funding time frame.

Because private lenders have autonomy, they don’t have mandated underwriting guidelines and are opportunistic in nature. They are able to approve loans much more quickly than traditional banks — frequently within a matter of days. Additionally, since private lenders tend to fund directly off their balance sheets, it is common for them to fund deals without the third-party reports (such as appraisals or environmental studies) that banks require.

There is also term flexibility. While traditional lending sources typically stick to five-, seven- or 10-year terms with standard amortizing schedules, private lenders can be flexible to meet the needs of the borrower. Examples include a 12-month loan with interest-only payments or a 24-month loan with no prepayment penalties.

It also tends to be easier to have a direct conversation with a private lender. These are typically smaller organizations that cater to brokers with individualized attention, including direct communications with decisionmakers. This can be helpful for brokers whose borrowers don’t quality for traditional financing or when the deal in question involves a property in transition.

Sourcing the funds

There are two common ways that private lenders are capitalized. The first is through a bank line of credit, which utilizes a financial concept of earnings from a spread. With this method, a private lender might borrow $10 million from a bank at a 5% interest rate, lend it out at 8%, and keep the 3% difference as their profit or spread. This method has been used for decades, but as rates have increased and banks have limited their lending activities, private companies are having a difficult time using this method.

Another way that private lenders raise capital is through individual investors, family members and friends who are looking to diversify their portfolios. Similar to stocks and bonds, individuals can actually invest in commercial mortgages by owning either partial shares or the entire loan. This type of investment offers an opportunity to earn stable returns with relatively lower risk compared to other types of investment vehicles.

The process of investing in private mortgages can vary depending on the investor’s preferences, appetite and available opportunities. Generally, it is done through a mortgage fund, which is set up for the purpose of pooling investor capital and lending it out. The fund does all the work associated with the loan, including origination, underwriting of the property and borrower, conducting due diligence, closing and servicing. Additionally, if an issue arises, the fund will be able to lead any foreclosure process, which can be complex, arduous and require out-of-pocket costs.

A mortgage fund allows individuals to be passive while enjoying the benefits of mortgage investing. In exchange for leading the process, fund managers receive their compensation through upfront fees or an annual spread. If a broker is looking to secure a loan from a fund, they should make sure to do their homework on the company and its leadership team. Meet with them in person and ask them to provide examples of loans they’ve closed, the number of loans in their portfolio that have defaulted and how they’ve handled foreclosures in the past.

Mortgage broker tips

In a new market where debt financing is harder to originate, mortgage brokers can stay ahead of the curve by sourcing a private lender database, understanding their lending programs and knowing each lender’s due-diligence requirements. Having foresight on these items will allow mortgage brokers to match borrowers with the appropriate private lenders.

While there are many private lenders available, they each have their own criteria for property types they lend on, available terms, rates, leverage amounts and even borrower requirements. As a mortgage broker, it is imperative to understand each lender’s guidelines to present them with the right types of deals and borrowers.

Remember that the last thing private lenders want is an inbox full of deals that do not meet their lending guidelines. Understanding each lender’s criteria will streamline the origination process, allowing for faster lender quotes and smoother closings.

Real estate is a relationship business, so mortgage brokers need to develop personal relationships with lenders through educational phone calls, in-person meetings and — most importantly — the delivery of high-quality loan scenarios. Brokers should strive to go above and beyond to assist lenders during the due-diligence process. This includes presenting a complete deal story, providing all required documentation, and coaching borrowers on expectations and loan requirements. The brokers who are willing to put in the extra work to achieve direct relationships with lenders and perform during the closing process will ensure successful times ahead.

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To thrive in a changing economy, commercial mortgage brokers must be able to adapt to a new norm in which private lenders will be a top choice for borrowers in need of capital. It is worthwhile for brokers to get to know multiple private lenders and understand their programs, origination processes and management teams. Additionally, for brokers looking to diversify their own portfolios, consider an investment in a private lender with a proven track record, an experienced management team and strong underwriting
standards. ●

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As mortgage lenders, brokers and borrowers alike navigate this change in the private lending space, it’s important to understand that private money is an umbrella term that refers to a variety of lending practices. Hard money is one of these practices. Not every private lending option is the same, nor are they all appropriate for every type of commercial mortgage borrower.

“When borrowers think of the term ‘hard money,’ they imagine hard-to-place deals that aren’t serviced by traditional bank products or even by many private lenders.”

This is particularly true when it comes to hard money, which serves as a lifeline for many borrowers who need funding fast. In this light, it’s smart to underscore the distinctions between hard money and private money to illustrate how these terms ultimately mean different things for borrowers.

Defining private money

Referring to private money when a borrower may actually mean a hard money loan is like asking to rent a vehicle when what you really need is an SUV. The term “vehicle” could refer to any type of model, from a two-door convertible to an 18-wheeler or something else altogether. Sure, they’re all vehicles, but if you need a cargo truck, a sedan simply won’t do.

The same metaphor applies to private money and hard money. While these terms are sometimes used interchangeably when discussing commercial real estate, there are important nuances that affect when each type of loan might be required. These nuances can affect a borrower’s eligibility and repayment terms, among other factors relevant to their deal.

Private lending (or private money) refers to an individual, office or institution that offers loans not available through a bank or credit union. This type of loan may not always be secured by collateral such as real estate or other property. Underneath this umbrella, there’s a diverse array of lending options. Borrowers can find secured or unsecured loans, varying deal sizes, term lengths and interest rate fluctuations, just to name some examples. All of these factors influence which option is best for the borrower.

Additionally, private money can originate from accredited investors, angel investors, or even a circle of friends, family or acquaintances. These sources can structure their loan as an equity stake in the opportunity in question. Terms and conditions also vary widely between private lenders.

Hard money option

Hard money is indeed a type of private loan as it’s not tied to a bank or credit union. But hard money is defined by some key factors that differentiate it from private lending. Namely, hard money is always secured, so collateral is a must.

What a hard money lender chooses to accept as collateral varies. For example, real estate is commonly used as collateral, but only a select few hard money lenders accept raw land as collateral. Notably, hard money is often the best choice for high-risk scenarios as these lenders are experienced in navigating tricky deals and have the expertise to successfully close them.

Due to the high-risk nature of these deals, however, hard money lenders may charge higher interest rates, origination fees and closing costs. They also may require a larger downpayment.

Dealmaking essentials

When borrowers think of the term “hard money,” they imagine hard-to-place deals that aren’t serviced by traditional bank products or even by many private lenders. These lenders specialize in funding challenging, high-risk deals that involve hard assets as collateral — hence the term “hard money.”

An example of a situation in which hard money is a better fit includes a land loan. Traditional lenders and many private lenders won’t do deals involving raw land as they view it as too risky. If a borrower defaults, raw land as collateral can be quite difficult for a lender to leverage as repayment for their loan. Hard money lenders (and in particular, lenders with experience funding deals involving raw land) are sorely needed in these instances.

Another example is when a borrower needs to close a deal quickly. Closing a loan can take months, but hard money can shorten this timeline to as little as a few days. That’s because hard money focuses on the essentials for a sound deal. A clean title, a clean environmental report and an up-to-date appraisal are among the few items needed to move forward. This cuts out extensive paperwork, financial analysis and a deep review of the borrower’s history — elements that take weeks to complete and don’t focus on the true merits of the deal at hand.

In a similar vein, borrowers often turn to hard money because of a less-than-stellar credit rating. It’s important to keep in mind that credit ratings can be affected by a number of factors, such as a deal gone sour or a shady former business partner. These numbers do not always speak to a borrower’s ability to follow through on their commitments.

Unfortunately, there’s no room for this nuance when working with traditional lenders and many private lenders. Hard money is a vital option and, in some cases, is the only option for these scenarios.

Critical flexibility

One of the main reasons for using hard money is flexibility. There are often conditions attached to traditional and private loans, from how the money can be spent to a strict repayment schedule.

Hard money is often free from these restrictions. Borrowers can apply the funds to a wide range of needs, including refinancing to pay off debt, working capital or use as a bridge loan. This kind of versatility is more difficult to come by with other loan types.

This type of loan is also used in international deals. Traditional lenders and the typical private lender won’t touch an opportunity outside the U.S. For borrowers with unique, viable and profitable opportunities on the table, this fact can sink an entire deal. Hard money lenders — and specifically the lenders with a record of successful loan closings abroad — tend to be the only ones that can come through for these kinds of borrowers.

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Hard money holds unique importance within the wider world of private lending. The distinction between hard money and the commercial private lending sector as a whole is important for borrowers with specific needs.

Whether that need is a fast closing, land as collateral, an opportunity abroad or simply more flexibility, there will always be borrowers with circumstances that make hard money the right fit for their deals. By making this distinction clear from the start, borrowers and hard money lenders are more easily matched with options that will help everyone close faster. ●

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Homeowners who were used to interest rates in the 3% range suddenly became more cautious. The number of new home sales dropped dramatically, as did refinances, in what experts call a market correction.

Existing home sales fell for the 11th month in a row in December 2022, with the majority of U.S. regions recording month-over-month declines, according to the National Association of Realtors. The reason for these declines is all about the uncertainty that exists regarding the real estate market.

“In today’s difficult real estate market, having a network of supportive, appreciative and like-minded partners and clients makes all the difference.”

This uncertainty is leading many mortgage lenders to be conservative on the deals they decide to finance. In fact, many banks have downsized their payrolls while others have merged and some have closed their doors altogether. But private lenders — and individual investors in particular — may be willing to take risks in this time of uncertainty.

Conflicting signals

Many investors are likely to stay conservative because no one knows what will happen in 2023. They expect the market to drop and they are rightfully scared.

If the past few months are a reflection of 2008, just before the housing crisis, then the economy is not in a good position. A summary of the Federal Reserve’s December 2022 meeting confirmed that benchmark rates are unlikely to be cut this year. But there are also some indications of a slightly different situation, which is creating further confusion among investors and consumers in general.

The December jobs report showed strong gains as the workforce added 232,000 jobs while the unemployment rate fell to 3.5%. This trend continued in mid-January when the U.S. Department of Labor reported that the number of first-time unemployment claims fell to 190,000, down from 216,000 a month earlier.

But the Purchasing Managers Index (a measurement of the prevailing economic trends in the manufacturing and service sectors) fell to 48.4 in December, its lowest level since May 2020 (and before that, 2012). This is a strong indication that U.S. manufacturers have entered a recession.

Calculated risks

Private lenders, sometimes called hard money lenders, can get their funding from a variety of sources. Private lenders backed by hedge funds or partnerships are often taking longer on the underwriting process while asking for more documentation.

For borrowers of private money, time is of the essence. These borrowers may want to seek out private lenders that are funded by individual investors, who will have more flexibility in approving loans. The borrower will likely find competitive interest rates and they may receive approval in a timely manner with less hassle and less documentation.

Private individual investors are also open to taking more risks by funding second-position loans, a type of loan that was previously only a distant thought in their minds. The reason they are willing to take this risk is because their return on investment will be much higher these days. But it must be a carefully considered decision — in other words, a calculated risk.

A second-position loan is a mortgage that is subordinate to the first-position loan. As a subordinate loan, it takes lesser priority than the first mortgage in the case of default. Second-position loans are typically for much smaller amounts. Borrowers who locked in a low interest rate in the past couple of years don’t want to touch their primary mortgage. Therefore, they are taking second-position loans to tap into equity. Second-position loans carry higher risk, meaning they’re also subject to higher interest rates, but they are very much a possible solution nowadays.

Buyer’s market

Yes, the real estate market has changed dramatically. It’s not the first time this has happened and it won’t be the last. For many borrowers, 2023 might look scary, but if they play their cards right, it could be a year of opportunities.

Zillow predicts a surge of first-time landlords this year. According to the online real estate company, the record-low mortgage rates of 2020 and 2021 spurred second-home investments, especially from smaller mom-and-pop investors.

Some of these people will rent out their second homes while others will sell them. It’s also likely to be a buyer’s market because sellers will be more willing to make concessions in order to offload their properties. ●

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Hard money benefits

How it works

Changing the name

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Players take action

Proof in numbers

Work is needed

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Evaluate lenders

In times of uncertainty, originators must put in the work to show that they are knowledgeable and worthy of a client’s trust.

Establish expertise

Rethink marketing

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