You have probably heard that hard money is aimed at borrowers who cannot get traditional loans because their credit is so poor and their income insufficient. It is not true. However, banks and other institutional lenders do tend to balk at hard money’s primary customer base: real estate investors.
It’s not that institutional lenders don’t like investors. They have nothing against the practice of investing in real estate. But thanks to a combination of risk management policies, regulatory restrictions, and unusual borrower profiles, funding investor real estate transactions is something banks are reluctant to do.
Fortunately for investors, that is not the case with private lenders like Salt Lake City’s Actium Lending. Private lenders with hard money to lend tend to step up – and enthusiastically so. They offer competitive hard money and bridge loans while giving real estate investors every opportunity to reach their financial goals.
Real Estate Investments Are Risky
Every lender, whether institutional or private, needs to pay attention to risk. Lenders consider risk profiles whenever approached for a new loan. The thing about commercial real estate investments is their higher risk profile. In simple English, real estate investments are too risky for most banks.
Consider investors who purchase commercial properties as landlords. They rent out office space, retail space, etc. Commercial landlords tend to struggle more severely during economic downturns. To a bank, this represents significant risk. So they tend to be reluctant to fund new acquisitions. Strangely, banks seem more than happy to refinance once a property is acquired and begins generating revenue.
Stricter Underwriting Requirements
Thanks to the 2007/2008 housing crisis and subsequent financial crash, the federal government put tighter restrictions on institutional lenders. For example, banks are now subject to stricter underwriting rules. They are compelled to ask for proof of income that investors usually cannot furnish. They are also required to scrutinize commercial properties more closely than ever before.
It all adds up to a scenario in which it is much harder for a bank to find its way to approval on a new investor acquisition. Banks typically do not want to invest time and resources in loan approval and underwriting if it’s not likely a loan will ultimately go through. All that work is for nothing when loan applications are rejected.
According to Actium, private lenders are not required to follow the same underwriting standards. The rules that govern how they do business are significantly less restrictive. That makes it easier for private lenders to see their way to approval.
Exposure Concerns
Next up or exposure concerns that come from the regulatory limits on commercial lending. For instance, government lending programs limit the number of investment properties an owner can have in his portfolio. Meanwhile, institutional lenders are required to manage their aggregate risk exposure so as to not concentrate risk in any one area. It all adds up to banks being less willing to fund investor real estate acquisitions.
They Can’t Work Quickly Enough
Even if all these factors were not in play, institutional lenders often cannot work quickly enough to satisfy property investors. It still takes banks much longer to approve and underwrite compared to a private lender. So the thinking is, “why even bother trying?”
Institutional and private lenders are not enemies. Likewise, banks do not show reluctance to fund investor real estate transactions because they hate investing or property. It really boils down to the fact that institutional lenders are not equipped to handle investor acquisitions. Private lenders are. So when investors need loans for new acquisitions, they turn to hard money.
