A private lender's view: how we're guiding real estate investors

Hi,

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As our community of readers and investors at Longleaf Lending has grown, I wanted to revisit and share the highlights from an article I wrote at this time last year - the insights are more pertinent than ever in today's real estate landscape.

I recently spoke at a Texas real estate event that my company Longleaf sponsored.

With the decades-long bull run in real estate showing some cracks, few of our borrowers have experienced the uncertainty of the current market.

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Despite rising rates, housing seems to be hanging in there in our part of the world. We are busier than we've ever been and we still feel comfortable lending money at conservative LTVs.

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There are certain behaviors I like to see from borrowers right now, and I offered these 4 tips for surviving and capitalizing in the current market.

1. Change how you underwrite deals

With market inefficiencies, it's possible to find real estate deals in any market. And in the future, distress may lead to very good opportunities. These are some of the key questions to focus on:

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  • Margin of safety: what if you need to hold this property longer than expected? Will you have enough cash reserves to fund additional holding costs such as interest expense and taxes?
  • Exit strategy: are you being realistic? Do I have multiple exit strategies (sell and refi) with outcomes that justify the risk I am taking in this market?
  • Leverage: is now the time to maximize the amount of debt you can put on a deal? More debt can mean higher returns, but it also comes with more risk that can blow you up.
  • Stress test your assumptions: what’s an acceptable future market value to assume if prices are currently falling? Is that a result I can live with? Can you still qualify for a refinance if rates continue to rise?

2. Communicate early with partners and lenders

We've had some difficult conversations with borrowers over the last few months, but each of those situations will have a good result.

Speaking early with lenders or equity partners is critical rather than waiting until there is real distress with a particular deal. We can also offer valuable advice and provide honest feedback about a particular approach in this market.

These are common situations we like to get out in front of:

  • A property is taking longer to sell or refinance
  • Loan maturity is approaching and/or the project hasn't progressed
  • There are liquidity problems with funding the rehab or meeting holding cost obligations
  • There's a conflict with a primary contractor or equity partner

3. Act decisively

“Live to fight another day” might be a good approach for the current market. We always recommend moving quickly if there are early warning signs of distress. I usually make these recommendations:

  • Listing not getting much interest? Have a plan to lower prices to generate additional foot traffic. Waiting risks the market moving against you. Holding costs will also continue to pile up.
  • Not certain your refi lender will be able to get the deal done? Reach out to 5 other lenders. Ask for referrals. Yes, loan applications are painful, but more shots on goal can dramatically help.
  • Current strategy not working? Change it. In this market, it's not a bad idea to run a dual-track sale and refi process from the onset. Have a backup plan ready to execute if you can't deliver the preferred outcome.

4. Stay on top of local market trends

National headlines aren't always the most helpful source of information for investing in local markets. Investor meet-ups such as the ones we sponsor are great sources of information.

As a Texas-based private lender, we also speak to investors every day. Anecdotally, here is what we've been seeing lately.

  • Houses are sitting on the market longer, requiring price cuts and more patience to sell. This is more true as you might imagine, for higher-priced properties
  • As the market has shifted in favor of the buyers, they are becoming pickier – high-quality flips are doing much better than lower-quality rehabs
  • Some short-term hard money lenders have stopped or severely restricted making new loans. Others, like Longleaf lending, are still lending for the right opportunities.
  • Investors are having more difficulty qualifying for refinances on rental properties: debt-service coverage ratio (DSCR) hurdles are becoming tougher to clear
  • Better long-term borrowing opportunities are with regional banks and local credit unions
  • Some investors are not actively buying as they take a wait-and-see approach
  • Demand is holding steady for buyers of investment properties

As we navigate the shifting real estate market, our focus is on guiding our borrowers wisely. This not only ensures their success but also reflects the health and stability of our portfolio.

Thanks for reading.

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-Matt Weidert

Invest

Earn 9-11% by investing in private lending

Borrow

Hard money loans for real estate operators