The Rise of Non-Traditional Lenders

Entrepreneurs and investors have access to a wide range of opportunities through non-traditional lenders.

last updated Wednesday, January 22, 2025
#Private Lending #Due Diligence

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John Burson

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The last decade has witnessed an evolution in real estate investor financing. Private lenders often operate away from the limelight and are among the leading players in the silent revolution. The Great Recession largely catapulted their prominence in financial circles.

After the economic downturn, the biggest challenge for investors was traditional lending institutions' new, strict regulations. This included rules such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S. and the laws affecting global banking, such as the Basel III accords and industry regulations.

The effect is that today, banks do not have as much money to invest in commercial real estate, fuelling the rise of a new marketplace. Alternative funding provides new funding for commercial mortgage brokers.

New Institutions

The changes in commercial real estate result from traditional financial institutions' new opportunities to invest their money. These individuals work with non-bank lenders who decide on the funds' disbursement. The lenders pool together resources, which can run into billions of dollars.

These private lenders do not face the same risk-taking limitations as banks, giving them access to diverse opportunities. The funds come from multiple sources, limiting an individual's financial risk.

The revolution has its limitations. In its early years, private lending faced reputational hiccups when dishonest lenders charged upfront fees and disappeared or denied the loan on "due diligence." Borrowers also feel that paying due diligence fees guarantees them a loan. Such fees are equivalent to appraisal fees and are required for valuation.

Many borrowers today still follow outdated practices, where they expect to access loans without paying any fees. This was previously possible because banks required borrowers to open accounts, creating long-term business relationships for the banks, along with insurance from the Federal Deposit Insurance Corporation (FDIC). In the worst-case scenarios, the government would step in to bail out the banks.

Available Options

Brokers can successfully onboard clients by first presenting the best financing options available. The process can begin immediately if both parties have all the necessary information. To prepare for any unexpected issues, the broker should have backup financing options ready for the borrower. It’s advisable to present these options before meeting with the lender to minimize any obstacles that borrowers may encounter throughout the lending process.

The new generation of non-bank lenders offers a wide variety of loans, services, arrangements, and combinations, similar to traditional banks. They provide a 90 percent loan-to-cost financing option and generally require minimal cash outlays while ensuring that borrowers retain ownership of their property.

Commercial real estate deals can access a range of financing options, including well-prepared venture capital projects. As financing from non-traditional lenders increases, alternative lending is becoming an increasingly permanent fixture in the market, particularly for real estate investments.

 
 
 

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