Evolution of Hard Money Lending

By Christopher G. Cox, managing editor and publisher of www.realesavvy.com

In the wake of the housing crash that shook the U.S. economy in the mid- to late 2000s, real estate investors had few borrowing options as financial institutions severely tightened lending practices. According to Nathan Trunfio, president of Lending for Pennsylvania-based Direct Lending Partners (DLP), this led to the rise of so-called hard money lending, where those willing to make real estate loans could demand returns of 15-20 percent and four to five points.

As a result of the bursting of the housing bubble, there were a lot of properties that needed to be foreclosed on, Trunfio said. “They were foreclosed on, but people were still in them or banks were holding them on their books and they needed to find a way to dispose of them,” he continued.

This created opportunities for investors to buy low, Trunfio explained. Many of these properties needed to be renovated and banks did not have the infrastructure to handle the renovations themselves. “Real estate investors needed a source of capital,” he said, “so they would turn to hard money loans, which were largely based on the value of the asset.”

Although the term “hard money lending” is still in common use, this lending practice has evolved to show a softer side. Trunfio notes that for many years a hard money loan was viewed as a “bad news loan,” one associated with some sort of “distressed situation where someone needs to pull equity out of a property.” These loans, he continued, typically reflected “some type of turmoil or big need that isn’t necessarily going to result in a good situation.”

In the current lending environment, Trunfio said, people are looking to utilize a loan for the purpose of “navigating a business plan on a piece of real estate.”

“I call it soft money,” Trunfio notes, “because the approach that is taken is a combination of the analysis of the strength of a real estate investor and the asset. We are in the business of providing short-term bridge loans to experienced real estate investors.”

Asked why a borrower would seek one of DLP’s bridge loans as opposed to a more traditional loan from a bank, credit union or other lending institution, Trunfio says there are a number of reasons. “The main reason,” he notes, “is that nowadays banks have credit policies that are too tight. They can’t move quickly enough, and they won’t lend on an asset that needs renovation, or that needs a tenant, or something along those lines.”

Trunfio notes that DLP works with a wide array of investors from singular individuals and small teams to organizations of 20-50 people. “Our loans are to real estate investors – I call them serial investors – who invest in real estate as a way to make their money, whether it’s a primary or secondary focus.”

For about the last 10 years, Trunfio said, more and more institutional investors have begun to recognize that there are many financially savvy borrowers with sound investment plans. This has led to increased lending competition which allows investors to find loans requiring 8-12 percent interest and one to three points, as opposed to tougher terms in the immediate wake of the crash.

“Hard money has evolved into opportunistic money for real estate investors,” said Trunfio, “which helps the economy in a number of ways by providing more housing where there is currently a housing shortage.”

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