Since the beginning of the 2012 recovery in real estate, developers have more options and flexibility for financing for their projects. Now more than ever, many developers are increasingly turning to alternative lenders due to a number of important factors. Alternative commercial real estate lenders offer numerous benefits such as shorter loan approval times, flexible terms, and a willingness to lend where traditional establishments are exceedingly risk averse.
The 2010 Dodd-Frank Act changed regulations on depository institutions, creating an opportunity for the alternative lending sector to step in and provide financing where traditional, regulated financial organizations were prohibited. For instance, data from the CBRE indicates that alternative lenders lead by cumulative volume in bridge financing. Also, this sector accounted for 39% of all non-agency loan closings in the commercial real estate market at the end of the 3rd quarter of 2021. Here then are some of the top trends that experts in this matter have forecasted in the commercial real estate alternative lending industry for 2022 and beyond.
Big data, machine learning, and artificial intelligence (AI) will play a greater role in alternative lending
For many years before the pandemic, alternative lenders had already succeeded in disrupting the longstanding traditional commercial lending space by innovating novel methods of understanding risk better and implementing improvements in data collection and analytics.
This, in turn, has gone on to streamline the loan underwriting process and fast-track decision-making. Alternative lenders such as ReProp Financial are now well positioned to offer faster loan disbursement and greater customer satisfaction.
Indeed, alternative lending now has a significant edge over traditional lending when it comes to answering requests and providing funds swiftly. This is simply because we are able to evaluate property value, ability-to-repay, and borrower exit plans as primary factors. Banks assess financial statements and the applicants’ previous loan repayment history, and often require further documentation, caused by their own excessively cautious pace of evaluation. Alternative lenders take into consideration key questions of value and ability-to-repay, with which they can easily gauge whether an applicant is well secured in the loan despite possessing a lackluster credit profile. As big data, machine learning and AI develop more sophisticated market evaluation tools, alternative lenders are well positioned to be early adopters in their day-to-day operations.
Peer to peer lending will gain more traction as an alternative lending solution
Prior to the pandemic, peer-to-peer real estate lending looked and felt like more of a wild wide west landscape. This is not the case anymore. Today, this alternative lending option has at last cemented its reputation, partly thanks to the pandemic. It has also proved its trustworthiness, and better yet, delivered on its promises and trounced even the most optimistic expectations.
FinTech platforms connect borrowers and lenders almost directly with a computational risk profile in lieu of human underwriting. Lenders in Peer to Peer must evaluate for themselves two risks: First there is the classical credit risk of the borrower, second is the platform risk that the peer to peer site has all the legal requirements in place to return investors money. Few platforms have a robust legal framework articulated by which to return capital should the platform close or go bankrupt. It could take years of legal proceedings to return investor funds.
Construction mortgages will be on the rise in the alternative lending space
The bridge loan lending space is noted for being overcrowded and one that yields lower gains in comparison to other alternative lending solutions. Consequently, more alternative lenders are now beginning to embrace the construction mortgage business in search of higher yields and lesser competition.
This is a very attractive state of affairs for commercial real estate developers who now have more leverage than was ever historically possible. Among other things, this includes much more flexible underwriting standards when it comes to sponsorship, project business plans, and even geographic location. All this has made more new construction commercial real estate development projects move forward in the past few years than was previously the case. Construction loans are all the rage at the moment and this trend is bound to gain more momentum for the rest of 2022 and beyond.
The expanding number of households are faced with a shortage of houses available, which has driven up prices in real estate. Construction professionals are ready to produce dwellings, provided they can find financing. The variety of construction draw arrangements and loan structure are as numerous as the alternative lenders working in the space. Alternative lenders will underwrite and fund construction draws to pay off subcontractors by preference. At ReProp Financial, we prefer a set draw schedule based on completion milestones to simplify the construction process, which ensures that the project is moving forward and the expenses are covered for the work complete. Another advantage of ReProp is we only charge interest on the outstanding balance of the loan, rather than the entire balance from day 1, saving our borrowers lots of money.
Reprop Financial is a leading alternative lender that specializes in offering commercial property financing and B2R financing including building loans in the states of Washington, California, Arizona, Oregon, and Idaho. Call us today to access a building loan with terms that are specifically designed to suit your unique needs and circumstances!
