The Tech Revolution in Real Estate Lending: Are We Overlooking the Basics?

Question

Over the past quarter, I have seen around $1B in defaulted fix and flip loans - many of these from new lenders since 2020 and more of a "tech platform".

As we all know, the intersection of tech and real estate investing has brought incredible innovation, especially in hard money lending. I continue to see new platforms promise ease of use, lightning-fast approvals, and streamlined processes. On the surface, it’s a game-changer. But as someone who’s been in the trenches of real estate investing for almost 30 years, I continue to see some flaws.

Some of the flaws I have witnessed are when tech-driven companies seem to lack backing from experienced underwriters or seasoned real estate professionals. Instead, they’re relying heavily on algorithms to make underwriting and valuation decisions. While algorithms can analyze data at scale, real estate isn’t just about numbers—it’s about nuances and the most important component of real estate is understanding its value, and that to me (maybe I am old school) but can only be done by physically visiting and walking the property.

So for me, factors like local market conditions, property inspections, and borrower credibility can’t be fully captured in a formula. Without a deep understanding of these elements, can you underwrite a deal via an algorithm ?

What are we seeing? Borrowers overleveraging, deals falling apart, and platforms absorbing starting to selll off these losers.

Now do not get me wrong, tech has its place in real estate, but it’s not a replacement for expertise. For me - my two cents are no amount of innovation can replace sound underwriting and valuation practices.

Curious to others thoughts

Dominic Mazzarella · Answer

On the surface I agree with your sentiment. But I think I would need to see more data to make an informed decision. Such as, what percentage of those $1B in defaults came from tech platforms as opposed to traditional lenders? And are there other factors that could be attributed to those defaults?

One example would be the office sector being hit hard with defaults. This had nothing to do with economic or underwriting issues but was driven by covid and many workers beginning to work from home.

There may be other issues at play here that have little to do with a lack of experience at real estate tech platforms.

Patrick Roberts · Answer

Honestly, I think this might be more symptomatic of larger issues in the real estate world in general. Generally speaking, I think tech like this stuff and social media have lowered the barrier to entry, allowing people to take risks they dont fully understand, whether wholesaling. flipping, lending, etc. The tech itself is great, but this is the equivalent of letting 12 yr old kids drive on the freeway. Some will probably do fine with it, but the number of spectacular crashes amongst this demographic will be a multiple of the norm.

Dan Deppen · Answer

The world of real estate tends to be pretty medieval from a technology perspective. A financial calculator and legal pad might work in the hands of someone who knows what they are doing, but that doesn't mean it's the best way to do it. A horse and buggy might get me where I want to go, but I'll choose other options.

That being said, just because someone is using an algorithm doesn't mean it's the right one. I'm not familiar with these platforms, but it sounds like they aren't mature enough yet to capture the important nuances that Chris mentioned. Having models is great if you understand their limitations. Self-driving cars are potentially amazing, but they need to capture a lot of nuance and complexities. Give me the horse and buggy vs a self driving car with immature software and sensors any day.

My point is you should use as much technology as you can to make your life easier without going beyond its limits, and in the meantime always be on the lookout for new solutions that solve problems without creating new ones. Having worked for both tech startups and large tech companies, there is a tendency for organizations to focus on one competency, usually the one that the founder has. To build a platform like that, you definitely need technical skills, but it needs to be informed by real estate domain experts as well. You also need UX, support, quality, a million other things. You can't just solve one piece of the puzzle and then ignore other important pieces.

Tracy Z. Rewey · Answer

I want technology to help me gather information and execute quickly.  It can be trained to provide an initial analysis but I agree, nothing replaces expertise and sound underwriting.

For us in the seller financed note investing world, we are often looking to find value in a deal that fell outside of a traditional banker's lending box.  It is challenging to build an underwriting box for something that fell outside an underwriting box.

There are guidelines and guardrails, but a challenging deal can have positives and a golden deal can have issues below the surface.

The Tech Revolution in Real Estate Lending: Are We Overlooking the Basics?

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