Friday, 07 August, 2020

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Unique needs require unique lenders

If you thought private lending was an on-again, off-again source of funds, think again. Today’s private lenders don’t run out of funds and disappear until the loans pay off. They operate as full-time businesses that always have funds, always answer the phones, and are always looking for the right projects to support.

Because of this, there’s a lot more reputational risk involved to lenders who have built a brand in the private lending space—which is great for brokers.

Ryan Powers is a principal with New Wave Loans, a Florida-based (and Florida-only) private lender that serves the needs of the unique population there. Founded close to a decade ago, New Wave Loans focuses on serving borrowers with second homes and investment properties, as well as foreign nationals.

Powers is seeing a lot more commercial loans in the securitization market, and that continues to push rates down for the debt funds and make private loans more competitive.Growth in any form can come with growing pains, and with the kind of move to the mainstream, more brokers are paying attention and seeing how they can get involved.

“That difference between the interest rate that a community bank charging for a commercial loan and what a debt fund is charging has shrunk, so people are moving toward the debt funds and the private funds. But with that we’re seeing a lot of brokers who don’t traditionally broker commercial loans also moving to the space, and I think that it’s a different animal,” he said. “A lot of things are the same but a lot of things are different. As a commercial lender, there’s sometimes training of brokers who have a decade of experience brokering residential loans but haven’t really done commercial loans or have only done a few, so it’s working with these brokers who haven’t done it before or who are less experienced.”

What differences brokers can expect

Traditional residential brokers who come to private lending thinking that there aren’t any rules will be sadly mistaken, Powers said. Some regulations may not apply, but there are still things that a commercial lender is going to need on paper to approve the deal. Environmental reports may be unfamiliar to new residential brokers, as well as commercial appraisals, which are different than residential ones.

The lending process can also typically take a longer time from start to finish, which may be frustrating for brokers who are used to the speed (and technology) associated with residential lending.

Choosing a lender

With the growing number of private lenders, competition is getting steep, pitting more experienced lenders against those who are new to the game. So even if an inexperienced lender has a great product, they may not be able to offer the smoothest experience to a broker. The safest options in the private space have two things: direct access to capital and a proven track record. Just because they have one doesn’t mean they have the other, and Powers suggests asking for past deals and/or checking public records to verify.

“It’s not just a monthly payment; it’s more of a relationship on a commercial loan,” Power said.

New Wave Loans used to make mostly residential loans that the banks wouldn’t touch, but as the residential got more competitive, they grew dramatically by moving into the commercial space as well. Today, they’re heading into even less competitive sectors, such as land loans.

There is a learning curve with any new product, and working with private lenders is no different. Powers said that the brokers who stick with the private space are rewarded accordingly.

“The deal size is much bigger, the people involved usually have some more financial experience so there’s a lot more repeat clients, but if the brokers aren’t willing to learn, they can really let down their clients and they can ruin relationships—not on purpose, just by getting into something they don’t understand and leading their borrower in the wrong direction,” he said.