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Tackling the Challenges of a Competitive Lending Environment

LendingEarlier this year, Forbes valued all the homes in the United States at an estimated $31.8 trillion, making America’s housing stock the largest asset class in the world, which inevitably creates quite a lot of competition in the industry. As investing in real estate becomes more competitive, investors look for alternative solutions, such as private lending or hard money loans. These can be best options for funding for investors, especially when investors are looking to purchase property that does not qualify as a conventional loan.

Hard money lending can also be beneficial for investors when they need quick funding for a project that they can quickly resell for a profitable margin. As hard money lending becomes more common, lenders are becoming much more competitive in their strategies. These changes in the lending industry are coming in the forms of technology, interest rates, and what lenders are doing to their underwriting standards to attract borrowers and investors.


Almost every industry is changed by technological innovation, and the lending industry is no different. Technology in the private lending market is a must if you wish to stay competitive. It allows lenders to create a more seamless experience throughout the entire lending process, from origination to servicing. Marketing is also, without a doubt, a huge aspect of staying competitive and technology gives lending firms the ability to market through social media platforms and prove that they have a customer service mindset.

Automated valuation models allow borrowers to quickly input all the necessary data that is needed to analyze whether the lender can lend to them or not. And of course, you can’t mention technology in real estate without mentioning big data and analytics. Data sources provide lenders with necessary information when determining their loan analysis; and websites like Zillow and Redfin can give accurate property valuations used to determine underwriting guidelines and adjustments, based on the location of the property.

Interest Rate Skepticism

Unlike a conventional loan, hard money lenders take on more risk, for that reason, interest rates tend to be higher than a conventional loan. The interest rates may differ depending on the lender and the location of the property. For example, California’s hard money industry is highly competitive and therefore has decreasing average interest rates. Another factor affecting competitiveness in the lending industry is the number of points a firm may charge on their loan. Some lenders may decrease the points they charge on their loans in order to stay competitive within the market.

Interest rates impact the real estate markets because as rates rise, the cost of borrowing money increases. Rising interest rates combined with a shortage of inventory in the housing market, contribute to the difficulty for anyone looking to buy a home. As an investor, it’s not necessarily a bad thing because families still need a place to live, so they will turn to renting instead. As renting becomes the new trend due to higher interest rates, there is an incentive for developers to invest in multifamily and rental problems. This is another reason why hard money loans are advantageous for investors, to develop projects for this kind of living.

Easing of Underwriting Standards

Asset-based lending allows firms to be more flexible with their underwriting guidelines. For example, private lenders can give a more favorable loan-to-value (LTV) ratio if the borrower is experienced in renovation projects or how much rehab is involved in relation to the “as is” value of the property. When determining underwriting guidelines, hard money lenders put more emphasis on the asset itself when evaluating the risk assessment.

Lending involves risk, but sound underwriting decreases those risks. However, as real estate competitive pressures continue to grow, lenders are loosening their underwriting standards by requiring less of a down payment or giving a greater LTV amount, allowing funding with lower credit scores, and requiring less documentation to support a sound exit strategy; all of course at a much greater risk that a competitive lending industry has created.

About Author: Benjamin Donel

Benjamin Donel, Esq. is the Managing Principal and Founder of Sunset Equity. As a licensed real estate broker and attorney, he is a real-estate investor. He has flipped over 1,000 homes and focused especially on distressed assets, foreclosures and note purchases. Donel has been invited to seminars and international talk shows as a subject matter expert in real estate investing and finance. He is also a published author, releasing his new book on real estate investing later this year. Donel graduated from the University of California—Santa Barbara with a Bachelor of Science degree in Biochemistry and Statistics and later earned his J.D. from Ventura College of Law.

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