Why is Hard Money Private Lending so difficult right now

Question

Seems like getting lending is over complicated and no-one wants to make money.  I have done 5 deals on my own in the last 3 years 3 in the last year. 720+ credit score across all 3. And about $28k in the bank, LLC with steady income and I make over 130k on my 9-5 w2 job.

Just bought a SFH 3/1.5 40k Purchase, 40k rehab ARV $135-140k  Closed on this on May 1st and will be a FLIP

Also on contract to close a Duplex 4/2 1800sqft per side  for $30k Purchase, $40k Rehab and ARV of $115-120K Rents are 850-950 per side a month... scheduled to close May 18th and will do a BRRRR

Every hard money lender i have contacted is non responsive, slow to call back or no products because of COVID-19

I've done my past houses with my own money, doing two at once with out funding will be difficult, but it seems no-one wants to lend?  Every one else see the same problems?

Dave Roe

Jeff S. · Answer

The four most dangerous words in investing:

This Time It’s Different

Jeff S. · Answer

“Seems like getting lending is over complicated and no-one wants to make money.”

Not sure if you’ve read the news lately, @David Roe, but we are in the middle of a pandemic and at the beginning of what could be a severe global recession.  This is less about making money and more about not losing any.

We could argue, but the comps you are using to determine your ARV are likely unreliable.  It took from 2007 to 2010 for housing prices to stabilize during the great recession, and then another two years for them to noticeably climb.  Your comps might be precisely accurate today, but there is no way now to know that they represent the market in 6 months, or whenever your flip will be complete, as a lender would normally use them.

Lenders are holding back because of uncertainty, not because they don’t want to make money. Plus, many of their funding sources have dried up.  Direct lenders, who loan their own money, might be your better bet.

Also, since it appears you’ve used your own money in the past, have you ever borrowed hard money? Even in the best of times, like two months ago (Ha), it would be difficult to find a lender willing to loan $40k.

This in no way excuses anyone from not returning a call.  That’s just rude, unprofessional, and probably good that you learned about these particular lenders now.  Nor does it mean that no one wants to make money.

Derek Carroll · Answer

@David Roe

No. I’m still very active with single family flips. Single family rentals and large syndications I’ve somewhat put on pause while monitoring markets and circumstances, but my lender are still very much active. In fact I have more lenders than available deals. I only bring this up to say that I do think it’s worth your while to continue to broaden your search for lenders. If you’re a strong borrower with experience and a verifiably strong deal, id think that you can find interested lenders in most markets.

Odie Ayaga · Answer

@David Roe I'm not sure the point you're arguing. Unemployed is unemployed it doesn't matter what the reason is in this case. One of the other posters already mentioned that it's not like we're going to flip a switch and everyone is going to have a job again. A lot of jobs that existed won't anymore. You said yourself "this has never happened before". It sounds like you're answering your own question yet still confused by the answer.

Lenders aren't looking into "never happened before" they want to minimize their risks to the best of their ability. On top of that, many of them have investors that have backed out because of the uncertainty of the WORLD situation. Many investors who even have the experience behind them are dealing with townships that are slow with inspections, long lag times on appraisals and other unforeseen obstacles out of their control. It isn't difficult to scroll through just these forums and find a number of stories of people stuck in these situations. People don't want to buy or sell because of what it entails in terms with being in contact with other people and their things. There's a myriad of issues in housing right now that understandably lenders are taking a defensive stance against.

Joe Cassandra · Answer

If this pandemic lasts until the election...then we're in even BIGGER trouble.

The top greediest banks in the world (think Goldman Sachs..Wells Fargo) are hoarding RECORD credit reserves because they believe a wave of defaults is about to hit. (on mortgages, car loans, credit cards).

Banks making multi-billions...armies of thousands of analysts and data to base their projections on...

They're taking precautions because this is an unprecedented event.

One not ever seen in the past 100 years.

But you must know a lot more than them about the future... :).

(fyi, there are 33M unemployed people. Over 15M more than during 2008. Once the economy is open again, it's not employers are kicking open their doors like the opening of Walmart on Black Friday..."everyone come on back." It'll probably take 12 months minimum for all those people to get their job back.)

----

We likely won't see any troubles in RE (if it even happens) for another 6-12 months.

RE lags the markets.

RE didn't bottom until 2010-2011...two years after the major stock crashes and unemployment.

Nghi Le · Answer

@David Roe Whether you think the virus or pandemic is real... the effects of it certainly are.  We're all living in uncharted territory right now.  You seem fairly confident in your prediction of a quick recovery.  Did you also predict that our country (and the world) would be where it is right now from this virus?  Can you predict how much longer we'll be in it?

The reason why investors and lenders, especially those who've been doing it for decades, are scared of the situation isn't necessarily because of the virus itself, but because of the reaction to it.  They don't want to put their money at risk when they can't predict what people (and the government) are going to do.  They're more concerned with return OF their money than potential return ON their money right now.

If the quarantines and shut-downs had ended last month, I would have felt better about the economy and the housing market.  At this point, I think some things are permanent.  Not everyone will get their old jobs back because a lot of jobs simply won't exist anymore.  Companies/businesses (especially restaurants and startups) are going out of business.  Those that can last until the country opens up again are not going to go on a hiring spree when the pandemic is over because their consumers won't be back to their normal spending habits right away.  Do you think you'll see airplanes filled to capacity anytime soon?  Or packed football games, movie theaters?  Do you think people will go back to work and start spending simply because the President says they can?  Watching other countries that have opened up ahead of us gives an indication of our recovery.

You mentioned that things were so good before this virus came along.  There were a lot of folks saying that we were overdue for a recession (based on historical data of normal markets), and this virus just kick-started it.  Whether you believe that or not... do you disagree that we were much closer to the peak than the bottom?

In my market, we're still seeing insane competition, an average of 4-5 offers within the first week with pre-inspections.  One of my investor friends listed a house a couple of weeks ago and had 50 showings and 10 offers, all at or higher than list price.  Within 3 days, they got under contract with $110k over asking, all contingencies waived, and non-refundable earnest money.  Do I believe that our market will be this good in 3-6 months?  Definitely not.  Real estate tends to lag the economy by at least 6 months here.  So I've stopped buying flips and BRRRRs because I don't know what an ARV looks like in 6 months, and I don't know what the state of lending will look like either.  When lending changes, I don't know if I can refinance (my BRRRR), and I don't know how many of my buyers can still get a loan (for my flips).

I think you may be able to find lenders for your deals, but keep in mind that lending on your price point was difficult even before the pandemic.  I recommend looking for lenders local to your properties because they're more familiar and comfortable with those price points.  Lenders have already priced in risk, meaning that you're going to pay more for less (compared to before).

David Roe · Answer

@Joe Cassandra

2008 people “lost” their jobs, 2020 the government fired 33million people by closing everything. it’s proven now that COVID was already in the USA n November&Dec Ohio claims they had cases in Early January.  I don’t know one business owner here in Ohio that will wait longer than the State allows or plans on doin more than they require.  They are protesting and opening anyway against orders by the state.

Far as unemployment now we have people collecting a $600 bonus to not work, of course they will stay on it till it runs dry, my nanny got paid $500 a week to work, now she makes $856 a week on unemployment...  Guess which one people will chose?

Any way, this post isn’t about COVID just curious if all the other states and markets are slow to lending and it sounds like it is.

Dave

Ryan Mainwaring · Answer

Great quote.  I thought this article was well written and had some good points on comparing now to 2008 and 1929.  I do agree, times are different.https://www.biggerpockets.com/blog/5-reasons-2020-recession-completely-2008?utm_source=newsletter

Alexander Felice · Answer

liquidity is going to tighten during downturns and periods of high volatility.

lenders are also going to be more risk averse

hard money is inherently higher risk for borrowers, it lives on the basis of extreme market liquidity, and it's used explicitly for deals that institutional lenders won't take the risk on (flipping is a horrible business model for a regular bank).

you aren't alone by any means, there are still people out there lending but it's going to tighter going forward for a while.

David Roe · Answer

Not sure why it replied to myself.. lol

Why is Hard Money Private Lending so difficult right now

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