The Era of High Leverage is Over.

Crazy isn’t it? Six weeks ago, a Real Estate developer could finance 90% of his or her acquisition and 100% of their construction costs on a single family flip. I was personally writing many of those loans. In hindsight, I wish I hadn’t.

For More Insight on the ins and outs of Hard Money Lending in Boston, tune into the ifundboston Podcast on Apple Podcasts, Spotify, and I Heart Radio. Follow ifundboston on Instagram, Facebook, Tiktok, Youtube and Twitter! Boston's Best Hard Money Lender!

The Coronavirus’s economic fall-out, I believe, has yet to affect the residential Real Estate industry for most people. There are still properties being listed for sale, although not as much understandably. Those properties are being purchased, and banks are still closing on them. One of my clients recently wrapped up a single family flip and within the first few days of listing it, already had six showing requests. Sure, showings and the day to day operations of most real estate agents has stalled, but technology is allowing transactions to happen. 

Will it Continue? That’s not so clear. Throughout history, during any economic contraction, the construction and real estate markets undoubtedly will get affected. Combined, they are about 8 to 10% of the total GDP. I have argued from the start of this pandemic that it is nearly impossible that Real Estate values will not be affected. Many Real Estate professionals have given me a lot of push back on this, with some flat out telling me that I’m an idiot. Ha! Time will tell if I’m right, but let me share the reasons behind my thinking.

Number one is unemployment. There are almost 25 million people claiming unemployment at the time of writing this article, and that number is only going to grow over the next several weeks. So right off the bat, there is a chunk of the buyer pool out the window. However, it’s not just those who have lost their jobs that will be left out, it will be an equal amount of people who are fearful of losing their job. Business owners and employees alike are not sure what will happen to their industries. Although I personally believe we will bounce back and by this time next year, this will be just a bad dream, it seems inevitable that the majority of people will refrain from making big monetary investments until some stability and certainty returns to the job markets.

Relating to unemployment, it is not adherently clear how many of those jobs will come back. There are a few reasons for this uncertainty, but primarily, it’s almost inevitable that some business will not be able to ride out this recession and will close permanently. Other companies will realize that they are functioning at equal productivity levels with less staff, and will not re-hire those laid off. It is not all doom and gloom because I do believe however that companies will eventually grow, pivot and new industries will arise that will provide plenty of employment opportunities. My point is that the next twelve months will see a sustained period of uncertainty, resulting in little activity.

For More Insight on the ins and outs of Hard Money Lending in Boston, tune into the ifundboston Podcast on Apple Podcasts, Spotify, and I Heart Radio. Follow ifundboston on Instagram, Facebook, Tiktok, Youtube and Twitter! Boston's Best Hard Money Lender!

So what does all this mean? It means the era of high leveraged loans is over. Conventional banks have already announced that those seeking a mortgage will be required to pony up 20% of the purchase price and have at least a 700 credit score. That’s right, shrinking the buyer pool even more. The good news for real estate values is that the decreased demand will also be met by decreased supply, as most sellers are wary of listing their homes now for two reasons. First, they don’t want people in their homes for showings due to the potential of coming in contact with Coronavirus. Second, they are unsure if values will drop and they will end up getting offers far lower than they expected. Can’t really blame either party. Basic supply and demand economics would suggest that this should keep prices relatively stable, however until that is proven, you will not see transaction activity return to normal, nor will you see many investors and private lenders jumping in either.

Hard Money Lenders have done a great job filling the void left open by conventional banks over the last decade. They have funded high leveraged construction and fix n’ flip loans to borrowers who otherwise could not qualify with a bank, or could not wait the typical 45 days it took a bank to close. The Hard Money Boston industry was one of the most active in the business over the last ten years, funding easily $500 Million to $1 Billion dollars in these private real estate loans each year during that time. iFundBoston alone has originated approximately $265 Million during the last eight years. It was a run unlike any other.

iFundBoston has funded approximately $265 Million in Private Real Estate loans across Greater Boston and New England over the last eight years.

That run may very well be entering a recession as well. Here’s a little secret about the Hard Money Boston world, and most likely the industry throughout the nation as well. Hard Money lenders are not sitting on billions in cash ready to disburse. Generally, once a hard money loan is closed, that loan is sold to a Wall Street Hedge Fund or pledged against a large Commercial Credit Facility, which then allows the Lender to re-lend that money. This ability to keep turning the same money over is what allows a lender who has $10 Million in balance sheet capital, to lend $100 Million in loans throughout the year.

The model works great, until it doesn’t.

Once the world came to a screeching halt due to the COVID-19 Pandemic, so did those Wall Street Loan Buyers and Credit Lines. They shut the faucet off, leaving many Hard Money Lenders to tell their borrowers they could no longer fund their deals. Due to the nature of the crisis and the uncertain nature of things, these Funds and Credit Lines do not have a timeline to re-open, which means the unfortunate result is that many Hard Money Lenders also don’t know when they can start lending again. Another inevitable result of all this is that since these Hedge Funds and Credit Facilities were heavily reliant on the appraised values of these properties, they will not have a clear understanding of where values will stabilize until at least late Summer.

If you are a Hard Money Lender in Boston right now or anywhere in the country, and you have real cash on your balance sheet, you will be able to clean house, and lend at whatever terms you want. Essentially, you are in very high demand, and there is little supply. What this means for Real Estate Developers and Investors is that their Hard Money Lenders are going to require Bank-Like down payments of 20-30% down, minimum credit scores, solid experience levels and higher costs. Many HML will shut down for good. The ones that survive will be pivoting their models into a hybrid of Wall Street, and a Private Fund which they will raise direct balance sheet capital from.

For More Insight on the ins and outs of Hard Money Lending in Boston, tune into the ifundboston Podcast on Apple Podcasts, Spotify, and I Heart Radio. Follow ifundboston on Instagram, Facebook, Tiktok, Youtube and Twitter! Boston's Best Hard Money Lender!

May the best lender win.