The Bridge Loan Market is Changing Tides

This past March, Covid-19 disrupted everyone’s day to day life. From curfews and lockdowns to wearing a mask when going out in public places, to schools and workplaces shutting their doors and moving to virtual formats, the real estate industry as we knew it also did not walk away unscathed.

Not surprisingly, the private lending industry was affected in an unprecedented way. The economy was shaken, and it was uncertain as to just how much damage was done. During this time, private lenders approached these new market challenges with different strategies as this was uncharted territory. Two main strategies were prevalent: one was to press the pause button on lending on anything new during this time to focus on managing existing loans, and two was to maintain lending with very strict and specific guidelines.

Now that the private lending world has begun to readjust to the current market fluctuations and uncertainties, new lending trends have emerged in the bridge loan market and are switching up customer demand and investment strategies.

Bridge Loans Are the New Comeback Kid

Bridge financing has always been and will continue to be, a great resource for real estate investors due to its ability to provide quick turnaround times and competitive pricing. Bridge loans provide short-term financing options, typically until another financing source, usually conventional financing, is acquired.

Bridge loans also give investors time. Time to get a property ready and cash-flowing, whether that be as a rental property or a flip to be re-listed in this fast-paced market. And with the current pace of the market real estate investors need every possible tool to keep up. The mix of having very low inventory, quick turnaround times, and properties selling at a higher cost is a great cocktail for bridge financing to literally close the gap needed for investors looking to acquire additional investment properties.

According to Realtor.com®’s October Housing Data Release, it revealed that nationally, a typical home for sale spent only 53 days on the market, which is 13 days less than this same time in 2019. This is the first time in Realtor.com’s records that homes sold faster in October than September, like occurred in 2020, and indicates a continuance of an unusually active and aggressive fall/winter seller’s market. This data sets up the market well for investors continuing to acquire investment properties in the upcoming winter months, as the real estate market shows no sign of slowing down.

Though something to keep in mind when determining an investment strategy and when to utilize bridge financing, inventory of newly listed properties has declined by over 7 percent nationally throughout this year, increasing the competition on properties listed and driving up prices. Realtor.com®’s October Housing Data Release revealed the median national home listing price increased by 12 percent over 2020, to $350,000 in October. This is up from the 11 percent growth seen in September. This is also why the speed bridge financers can provide when closing a loan to acquire a property is a must-have in this competitive market.

Bridge Loans Lucrative Option for Investors

The increased demand for bridge financing can also be attributed to the historically low-interest rates and the fast pace with which bridge lenders can provide funding. Although bridge loan rates are dependent on experience, credit score, term, and the size of the loan, the rates generally range from 4 to 13 percent which is extremely lucrative when considering the swiftness at which bridge loans can be acquired.

Speed is another major factor as to why bridge loans are thriving in this market. As stated previously, properties are only spending, on average, 53 days on the market creating a fast-paced, and competitive space for investors. By choosing to work with bridge financers to purchase properties investors can close on these properties much faster than conventional funding, typically in 7-15 business days.

Combine the experienced investors with the folks who left the unstable stock market to invest in real estate, like was seen in 2008, and the number of loan requests to bridge financers has significantly increased this year.

For example, between July and October of 2019 Bridge Loan Network received over 797 loan requests through the software. Now with this same timeframe of July through October in 2020 Bridge Loan Network has received over 1,988 loan requests in the software.

Market Trends Move Towards Longer-Term Options

Although short-term bridge financing hasn’t slowed down, seasoned real estate investors have switched up their investment strategies this year. The days of buying distressed properties to renovate and quickly sell are no longer feasible due to new safety restrictions and protocols in this “new normal”. Getting one appraisal done on a property could be challenging enough, and then adding multiple inspection reports for rehab draws and a project’s timeline increases substantially. With this, short-term bridge loans for fix and flip projects are not as lucrative now, as they were back in January/February.

This does not mean that investors are walking away from bridge financing altogether though, in-fact, it is the exact opposite. Real estate investors are just adjusting their investment strategies and therefore require different types of bridge loans from private lenders. Since investors are pausing on the flip projects and moving towards acquiring and holding long-term rental properties and building their portfolios private lenders have adjusted how they market their short and longer-term bridge options to attract more clients.

Article originally published in the American Association of Private Lender’s PL Magazine 2021 Winter (Q1).