Updated November 3, 2020

COVID-19 and Real Estate Lending

Wondering how the coronavirus pandemic will affect real estate lending? Economic crises can have significant effects on banks’ lending habits.

This article was originally published on the Anderson Funding Community blog, an exclusive resource for members of the Anderson Funding Community.

Private lenders have historically used three types of capital sources: directly lending their money or syndicated money, lending through secondary markets, or lending through Wall Street funds. Over the last few years, we have seen a steady rise in Wall Street capital in private lending. At least until COVID-19. All it took was an existential crisis to watch Wall Street run fast to the exit door.

The influx of Wall Street money made for lower rates and relaxed guidelines to speed up decision making. Now, with the exit of Wall Street funds, there are new stricter guidelines in place. With valuation less certain, lenders have a tougher time investing in new markets.

What we have seen recently is that it has temporarily been tougher for inexperienced investors to find capital. And if they do, they find higher rates, less LTV, and additional points added. Experienced borrowers are finding themselves preferred by more lenders. But they also find themselves having to put more of their capital into a project, resulting in fewer projects. With less competition in the market, they hope to make up that lost revenue with improved returns.

Banks have almost always behaved more conservatively coming out of an economic crisis than private lenders. This remains true today. It is much harder now to get bank financing on investment properties.

But change is starting to happen as we move our way through summer. Already, private lenders are starting to raise their LTV, lower their rates, and lower their requested points. Looking forward, the private lending industry’s future is as promising as ever.

For the next few months, new investors with less capital may feel the pinch and take the brunt of higher rates and lower LTV loans. Experienced investors with more personal capital will have a slight advantage in this tight market. Lenders are not placing the value of a property above its recent market-clearing purchase price. As an investor, you will need more of your own capital to complete your projects over the next quarter than you did pre-COVID-19.

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