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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2015

The Next Generation of Hard-Money Lending

Alternative equity financing is set to go mainstream in today’s investment market

The evolution of hard-money lending has taken a long and fragmented path with products ranging across the spectrum, including payday loans, toxic prime, signature loans and more. Market demands have shaped the product strike zone as well as the size of the stadium. Every economic cycle, interest rate environment and credit risk window has impacted what the market wants and what it will provide.

Against the backdrop of financial crises, demand for hard-money financing grew as collateral types and loan programs expanded, all while conventional financing retracted and conforming lending options narrowed. This set the stage for responsible lending opportunities and the continued evolution of hard-money lending into mainstream financing.

With that in mind, the term “hard money” no longer fits in today’s marketplace. A better term would be “alternative equity financing.” Let’s take a closer look at this new lending environment.

Market opportunity

Private real estate investors seeking affordable investment properties are in luck. Many U.S. real estate markets are on solid ground. Although some investors claim that there’s no affordable inventory or access to financing, the trick is to look outside of typical comfort zones. The 2014 Demographia International  Housing Affordability Survey ranked 360 worldwide markets on affordability based on the ratio of median income to median home price. Of 95 markets worldwide that were rated as affordable, 84 were in the U.S.

Some aspects of the U.S. housing market will never change: The most desirable locations will have the highest prices and greatest price appreciation, and the population will continue to migrate to the southwest and southeast. Given the overall picture of American housing compared to the rest of the world, the odds of acquiring something inexpensive are often long. The key is having a financing source that moves quickly, executes efficiently and operates in an accommodating manner.


Access to alternative-equity-financing options has grown dramatically because of the Internet. Simply typing “hard money” into a search engine will produce a list of originators, brokers, aggregators and service providers. The Internet has streamlined and replaced the Yellow Pages and dialing for dollars.

Technology-based origination tools also have increased transaction speed. The basic process of qualifying credit, collateral and capacity has become extremely efficient. Readily accessible data for appraisals, rent ranges, tax returns and bank statements has reduced turn times and increased the integrity of documentation.

Although there is still work to be done, the origination process is headed in the right direction. Some day soon the mortgage-fulfillment process will truly work at the speed of the client.

The GSEs

Fannie Mae and Freddie Mac are playing increasingly smaller roles in the real estate investment sector. Limits on the number of financed properties, maximum loan and loan-to-value (LTV) ratio limits, credit guideline restrictions, and collateral limitations all make it more difficult for investors to finance through the government-sponsored enterprises (GSEs). State and federal banks also have regulatory lending limits, balance sheet restrictions and reduced portfolio eligibility.

Demand still exists, however, and many dormant lending venues are starting to stir. The demand for lending alternatives is growing and the supply of funding options is migrating to meet that need.

The needs of alternative equity financing will no doubt be met outside of Federal Housing Finance Agency oversight. Claims that capital markets will come roaring back to fill the void have been unfounded, but the industry is now starting to see some qualified progress as new liquidity comes into view.

Inventories and landlords

Years after the housing crisis, the inventory of bank-owned properties no longer appears endless, but many markets still present opportunities. Most units are priced below their original sales prices, and many require some form of rehabilitation. This screams opportunity, especially with property values stabilizing in many markets and housing values improving in others.

Collateral types also continue to expand beyond single-family residences. The allure of multifamily, senior housing, executive suites and condotels is growing. Every walk of life has unique housing requirements that must be addressed and satisfied, providing endless opportunities for investors. The multifamily concept of single-room occupancy popular in the 1940s is even showing a growing position in the housing market again.

There’s also an influx of new landlords acquiring investment-income properties. Many private real estate investors who were on the sidelines waiting for the right time to move into the market have concluded that the time is now.

These new landlords have done their homework and studied what it takes to be successful. There is a generation of renters who need decent housing, and this demand can be fulfilled by simple and straight forward real estate entrepreneurialism.

Risk-based pricing

Hard-money lending has historically relied on the concept of “storytelling” underwriting. This underwriting approach took into consideration that every transaction had a story that could qualify the loan proposal. Underwriting tools, training, education and overall credit experience have placed most storytelling underwriting into the archives.

Today’s alternative equity lending relies on an underwriting process that quantifies a thorough risk profile, including credit, collateral, capacity, intent, integrity and exit strategy. In addition, interest rates are no longer quoted in wide ranges, but with true risk-based pricing that incorporates credit score bands, LTV ratios and transaction types.

Broker price opinion

Hard-money lending has also found a new way to determine the value of subject properties. A brokers price opinion (BPO) is a process used to determine selling prices. These BPOs are often used when lenders and mortgage companies believe that the expense and delay of an appraisal to deter-mine a property’s value is unnecessary.

Financial institutions can order drive-by BPOs or interior BPOs, depending on their needs. The BPO report includes the property value as well as a neighborhood analysis, comparable properties, and local and regional market information. Price determination is similar to a certified market analysis and a residential real estate appraisal, but is prepared by a licensed real estate broker.

Some factors that can affect the price of a property in a BPO report include the values of similar surrounding properties, neighborhood sales trends, and the amount of repair or preparation needed before putting the property up for sale. Ultimately, BPOs help investors understand their risks up front.

•  •  •

The entrepreneurial spirit within real estate dealmakers is alive and well. The intelligence, hard work, perseverance and commitment of investors, developers and moguls can make great things happen. Consistent lending protocols and loan packaging continuity in this new age of alternative equity financing give us a glimpse over the horizon to a time when hard money will no longer be considered the lending option of last resort. 


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