Available Private / Hard Money And The Need For Capital

It is always surprising to know that borrowers want to borrow money and that there is available capital but that both cannot match. Here we will take an initial look at why this is happening and what can be done about it. In general, one of the primary reasons for a loan not to get funded is that expectations are not aligned for borrowers and investors. Another important reason is that there is not a clear exit strategy outlining how the loan will be paid off. Addressing these issues and others will most likely improve the chances of loan getting funded.

Understanding the lending market is key to success. Here I am not thinking about the ins and out of the financial market, but more about how much money is available from funds and / or private investors. A number of us have seen our 401ks and IRA divided by two in the past year, this loss in value has also affected investors. Private investors are people like you and I who are choosing to make loans in addition to investing in the stock market etc… A number of investors that have invested with us have seen good returns in order of 7 to 8.5% last year but, they have experienced losses with other investments and need their money back. If we apply this behavior on a larger scale then we will see that there is much less money available even from happy investors. Thus we are currently in an investor market. There is MANY more loans requests than capital available. Only the most attractive loans will be funded.

Proper expectations make for loans to be funded. The first expectation is for borrowers to understand that they are in a lender / investor driven market. There is limited or no competition for availability of capital but there is a high demand for loans. Loan costs maybe higher today than they were even few months ago. The actions taken by the federal government in regard to lending do not affect the private lending sector in terms of availability of capital. Private money lenders DO NOT want to take over / foreclose on a property this is not what they do. Underwriting criteria are more demanding than before. On residential and commercial properties income or potential income will be considered. Credit quality is becoming a factor even for private lending. Overall borrowers should expect a more difficult environment.

Expectation and then exit strategy is the other issue. If a private lender does not know how and when the loan will be paid off then most likely it will not happen. Private lenders have in general a good idea of financing and market conditions. If they believe that the borrower will not be able to pay them back then most likely either the loan will not happen or the amount loaned will be drastically reduced. Thus if the borrower cannot repay the loan then another private lender could offer at a later date to make another loan and still meet general underwriting criteria. Having a carefully thought and documented exit strategy will contribute to a loan being approved or denied.