One of the striking developments in the hard money industry over the past several years is how much money has flowed into it. Wall Street firms are investing in this area. There’s foreign capital. Then there are people who are tapping their retirement accounts.
“Over the past four to six years, you’ve got this rise in prosperity, and you’ve got people looking for investments,” said Eddie Wilson, the chairman of The American Association of Private Lenders.
The American Association of Private Lenders is a for-profit organization that represents the private real estate and peer-to-peer lending industry. The association has more than doubled its membership over the past few years. One of the reasons is that some real estate investors who were buying and holding property or fixing and flipping homes are now trying their hand at lending.
“They’re finding the guy who is sitting at the closing [table] who is writing the check is making more money than the actual real estate investor,” he said.
Wilson spoke to Scotsman Guide about the state of this industry.
What are the opportunities that are hot right now on the residential side of hard money or private money?
A lot of developments have been started, and they’re in the middle and haven’t been finished. So, you don’t really qualify for conventional lending, yet you need to get it over the hump. It’s not a construction loan from the beginning. It’s kind of mid-development. We’re seeing a lot of that right now, especially in the tertiary markets. There are a lot of projects that have sat for a year or two or three, because of the [last] recession.
What are the challenges hard money lenders are facing today?
The most difficult thing they’re facing is the rate squeeze, because interest rates are rising, and there’s so much capital in the market today. It’s really a borrower’s market. They were used to getting 12 percent and 2 points. Now they’re getting 9 percent and 1 point. They’re having to deploy more capital. It’s more of a volume play today.
Is the lack of inventory and the lack of affordable housing affecting hard money and private money?
I think it is. I think it’s affecting the industry in a little different way than the traditional real estate investor. The real estate investor who has done well in the last four or five years, these guys were making higher margins, but they’re struggling to find the same margins. The inventory is lower, prices have gone up. Areas that were more of a rental area have now turned into more of a retail area. So, you’re actually finding a lot more of the guys trying to deploy capital versus just purchasing the asset. The bigger groups have formed funds.
Can you explain that to me?
A lot of my friends investing in Atlanta were doing 200 or 300 deals buying, renovating, selling or renting. Today in Atlanta, it’s nearly impossible to find inventory for a guy that’s doing 200 or 300 deals. He doesn’t necessarily want to broaden his market. He won’t go to Greenville, South Carolina; or Macon, Georgia; or Jacksonville, Florida.
What he’ll do is he’ll find 100 properties that are available in Atlanta. He’s still flipping houses, he’s still renting houses, but he’s formed a fund, and now he’s lending to investors in Greenville or in Jacksonville or in Macon.
What does your association offer people in the industry?
Obviously, we provide networking and connectivity like a lot of associations do. We provide a lot of education. We aggregate data. No one is really pulling the data for who these private money lenders, hard money lenders, are. What they’re doing. What are their lending practices. We’re constantly polling that audience of 600 or 800 lenders who are interacting with us to figure out where they’re headed.
We’re a source of ethics. We have a full ethics board and community. So, if someone were to be taken advantage of in this space, we’re the only ones that I know of where you can actually report someone. And we’ve banned a few from our association.
And the last piece is advocacy. We get involved when it’s necessary. We don’t necessarily lobby. It’s more advocacy, where we have 20 or 30 lenders in a state like Florida, and they say, “This is an issue. Can the weight of the association get behind our thought process, our ideology, our philosophy?”
We have, for instance, a day on [Capitol] Hill coming up in February, so we bring legislators together with these lenders just so the legislators understand who they are, what their mentality is, what their desires are. That’s what our association offers.
