Banks Versus Private Lenders & Crowdfunding
Have traditional banks and mortgage lenders been displaced by crowdfunding and new private lenders? Can they coexist together? Perhaps even more importantly, which is the best leverage option for real estate investors today? The mortgage market has changed dramatically over the past 10 years. Despite ongoing grumblings about tight credit and poor customer service at banks, many are finding it to be easier than ever in financing new homes and investment properties. New Loans & Lenders While the finance crisis saw many banks and lenders close their doors, the last 12 months have seen new lenders supplant those that recently went under. In particular, many new mortgage lenders have pushed their way into the market specifically to finance real estate investors, and single-family investment homes. High confidence in an extended period of appreciation has lenders bullish on putting money to work via aggressive new loan programs that stretch the boundaries. The loans extend well beyond what conventional banks are offering, and they are frequently doing it with superior customer service. Meanwhile, banks have continued to not only pull back on credit, and made it harder to get loans, but have kept offering less service for more fees. Most notable among new lenders and programs are a lineup of ‘but to rent’ lenders offering attractive interest rates on loans for portfolios of single-family homes, and backed by billion dollar hedge and private equity funds. Alternative Financing Options There have been even more creative alternatives stepping up to serve real estate investors during this time. This includes both crowdfunding platforms and private mortgage lenders. Many private lenders and hard money lenders are coming back into the marketplace fueled with new capital from individuals needing higher yields, and desiring income for retirement. Real estate just make sense. Local lenders of this type can be very aggressive in LTVs and even providing rehab funds, but will typically only loan for ‘business’ and investment purposes. They may demand higher interest rates and points, but they are the go to source for real estate investors when more traditional banks and lenders won’t loan, or are just too difficult to deal with. These lenders are especially valuable for those flipping and wholesaling houses, as well as those rehabbing homes and commercial properties. However, rather than putting other banks and lenders out of business, private lenders can work in tandem with them in a variety of ways, filling the gaps. What about Crowdfunding? Crowdfunding has evolved from basic partnership syndications and low level peer-to-peer micro-lending to becoming a technology fueled platform for raising money for all types of real estate projects. There are now dozens of crowdfunding platforms, and likely at least a dozen cites offering crowdfunding platform software to enable sponsors to set up their own crowdfunding platforms and websites. These range from donation based crowdfunding platforms like Kickstarter and Indiegogo to debt and equity crowdfunding options specifically designed for real estate. With so many options, there are virtually endless ways to fund raise for all types of real estate projects. Theoretically, with a little creative thinking and strategy; crowdfunding can be used to buy a new home, fix an old one, invest in distressed mortgage debt, or build a new office building, or entire community from the ground up. What’s incredible about crowdfunding is that there are few rules or restrictions. If you can imagine it, you can crowdfund it. Many might think this means crowdfunding has replaced banks as lenders, and could threaten to put them out of business. Considering the financial power they still have, they are unlikely to let this happen. However, they could learn to work together, for their mutual benefit. Crowdfunding & Bankers Can Coexist Both could benefit each other. Cautious banks could keep risks low and increase profits if they learn to work with crowdfunders. In fact, they need to. Major real estate brands like Hard Rock, as well as companies like IBM and Coca-Cola are crowdfunding. By offering better loans and service, banks could retain their security and solvency by allowing borrowers to bring crowdfunded deposits, closing costs, mezzanine funds, rehab money, and down payments to the table. Private lenders are already doing this, and are encouraging outside gap funding. For borrowers, this could mean more surety in long term success. For example; they could be more confident in landing attractive long term financing, and making tough deals happen if banks would give this type of source of money the green light. Options Rule Ultimately, none of these options is really superior to the other. It is about what works best for the individual or group, and for each deal on the table. What is important is being aware of all options on the table, and how they may be combined to achieve what others haven’t dreamed possible, and making more money doing it. How will you leverage and finance your real estate deals in 2014 and beyond?