Innovation in the Hard Money Lending Space

[Eric Boshart]

Hi BP Community,

I got my start in RE investing by providing a loan to an experienced flipper. Since then, I became the borrower, using many different hard money lenders on BRRRR's in the area. Lately, I've considered getting back into the hard money/private money lending space in a more scalable way. However, I'm struggling to figure out how to be innovative in the space as there are probably over 100 hard money lenders just in the DFW area alone, and they're all racing to the bottom in the terms of pricing, which leaves little profitability on a per-loan basis. The material I'm digesting that covers this topic isn't really providing me any creative new ways to add margin or serve the community better than what's already out there.

I'm turning to the BP community to see if any of you have had experience with innovative hard money lenders or have ideas on how to gain a competitive advantage and offer a superior product than what exists presently.

Thanks!

[Jeff S.]

@Eric Boshart wrote:

“… and they're all racing to the bottom in the terms of pricing, which leaves little profitability on a per-loan basis …

The material I'm digesting that covers this topic isn't really providing me any creative new ways to add margin ...”

I think you’re having digestive issues, Eric. 🤣 Why do you believe you have to compete on price?

Do Nordstrom’s or Whole Foods compete on price? How did it work out for K-Mart?

Everyone will always say they want the cheapest money they can find. In our experience, their actions speak louder than their words. I can tell you with certainty that experienced flippers, our market focus, are much less sensitive to a few points or percent than they are to speed to fund, maximizing LTV, minimizing payments, and above all a great trusting personal relationship. It boils down to having as many competitive advantages as you can. Here are a few I know are actionable:

• Even in our current overheated crazy market, most successful active flippers often have more deals than money and need as much as they can put their hands on. What LTV are you willing to loan at? 70%? 80%? 90%? How about 100%? The greater the percentage, the more popular you will be.
• Ditto, monthly payment deferral. This helps your borrowers preserve cash flow.
• Experienced flippers always make aggressive offers with a short closing period; say a week to 10 days. Often less. What if you could fund a loan in 2 to 3 days? Or, 24 hours in an emergency, such as when a lender flakes out at the last minute? Note that I wrote “fund” not “make a decision.”
• Similarly, are you 110% reliable? If you can’t be trusted to fund when required, not only are your competitive advantages irrelevant but so is your entire business model.  It takes time to develop this reputation and one bad deal to lose it.
• Lend to newbies. Perhaps specialize in this. Many lenders won’t loan to the inexperienced and this leaves a gigantic gap in the market you could fill (if you’re willing to hold some hands.)
• Obtain the proper licensing to make consumer-purpose loans to the self-employed, commissioned salespeople, or other well-qualified but hard-to-fund individuals. I’m not suggesting becoming a conventional lender. The few HMLs I know who do this are as rare as hen’s teeth and doing quite well.
• Lend to retirement plans. Many lenders always require a personal guarantee. You can’t require a PG when lending to a retirement plan. This is a crazy easy problem to solve.
• Most important, do you have a process to develop a strong trusting relationship with your borrowers?
  

What other competitive advantages can you offer which have nothing to do with the price of your money?  What asset class are you lending to? Are you trying to be all things to all people like the giant mega-HMLs? The narrower your focus, the better.

If you lend to out-of-state strangers, require two appraisals (I really know HMLs who do), credit reports, bank statements, W-2s, income taxes, 2 weeks to fund if you're lucky, and then hope to obtain 8% on a 75% LTV, then you are almost indistinguishable from most conventional lending criteria. This is the model used by many of the billion-dollar mortgage pools.

The billion-dollar mortgage pools can get by on a 3% spread. You can’t.