Residential Magazine

New Opportunities Could Emerge from Uncertainty

Individual investors may fill a niche as other lenders become more conservative

By Yanni Raz

There is no doubt that the real estate market has changed greatly over the past year. The Federal Reserve raised benchmark interest rates seven times in 2022. And four of these rate increases were a staggering 75 basis points apiece.

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. ●


  • Yanni Raz

    Yanni Raz is CEO of HML Investments and has been a hard money lender for more than 10 years. Raz was a real estate broker for five years before he partnered with a group of investors from California and began assisting real estate investors in financing commercial and residential projects. He writes about real estate financing for magazines, blogs and other online news outlets. Reach Raz at (818) 308-4443.

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