When a traditional loan isn’t a possibility, but you need funding for an investment, hard money lending is where you turn. Several years ago, hard money lending wasn’t necessarily considered the favorite option within the borrowing community… This was due to multiple factors.
1. Modern technology was not a part of the lending process. Unlike applying for a traditional, secured loan by filling out an application online, most loans were processed through PDF applications over email and “boots-on-ground” underwriting.
2. Capital formation was primarily from a few people with high net worth’s and “country club” capital.
3. Hard money lenders had a negative reputation within the lending industry. This was due in part to higher interest rates, but more importantly a combination of a lack of transparency, undisclosed fees, poor organization, and a severe lack of customer service.
However, as with most things, it has improved with time. On April 5, 2012, Congress passed the Jumpstart Our Business Startups Act, or JOBS Act, commonly known as “Crowdfunding Legislation”. This Act loosened restrictions on capital raising for small businesses. Although it was not originally intended for the real estate market, it became one of the largest uses for the Act. With this, venture capitalists joined the industry and brought technology along with them. They began creating online loan origination and underwriting platforms piloting efficiency, organization, and professionalism that had previously been lacking. These changes allowed them to grow at a rate not previously seen in the market.
The technology that came from the JOBS Act renewed hard money lending into a better, more borrower-friendly experience. Online applications, accessible pricing and terms, and online dashboards created a much-needed transparency. Increasing the amount of hard money lenders created competition, forcing the industry to become a more customer-service oriented industry. This has considerably helped grow the market for hard money lending. “In a short amount of time, this industry has gone from being served by local “country club capital” to being traded by some of Wall Street’s largest, most reputable firms.” (Rodak)
The last 5 years have brought substantial, positive changes to the hard money lending industry. It is still a small market within the real estate industry, funded mostly by small, private investment groups. “…the five largest online originators still only write between 5-8% of the total loan volume in the fix-and-flip market.” (Rodak) It remains a more personal alternative to traditional lending, based on assets rather than credit scores.