How Non-Banks Are Replacing Big Banks

Since the official start of the ongoing “Credit Crisis” back in the Summer of 2007, Private Money loans (debt, equity, and / or mezzanine) and Institutional Funds (i.e., Hedge Funds and Private Equity Firms) have provided more readily available access to funds for residential and commercial real estate investments than many of the largest U.S. banks. Non-traditional funding options have included individual investors (“Silent Partners” or Equity Investors), Crowdfunding, and Private Money or Hard Money Lenders. With Private Money, the collateral for the loan is seen, many times, as at least equally as important as the borrower’s qualifications, which provides more flexible underwriting guidelines as compared with Bank loans.

Many Debt and Equity Investors or Lenders pool millions or billions of dollars of funds from investors, and then provide them as equity money or loan options such as “Asset Based Loans” in which they are funded based upon the potential ARV (After Repair Value) or Future Value of a distressed or non-distressed property. The loans are made based upon current or future “LTVs” (Loan to Value) or “LTCs” (Loan to Cost) for a potential cosmetic “Fixer Upper”, or a deal which requires major renovation or construction repairs. In many cases, an investor doesn’t need to provide “Full Doc” underwriting items such as past tax returns or other detailed income or asset requirements.

For “Fix and Flip” or “Fix and Hold” residential deals, the Private Money options can be a much better option for investors since they can fund their loans much faster than government backed or insured financial institutions (“Time is money”). The difference in average funding time periods from start to finish can vary between a week or two for private money sources to well over a few months for government-backed financial entities.

In some cases, private loans may fund in a few days from start to finish with the bulk of the work completed online (i.e., title, escrow, loan, real estate contracts, third party reports, etc.), amazingly. Due to the large number of all cash buyers for properties in recent years, sellers don’t typically want to wait a few months to sell their home and close escrow. The faster an investor can gain access to funds, get formally qualified, and close escrow on a potential deal, then the more likely they will get their purchase offers accepted at the lowest offer prices possible.

Private Money Solutions vs. Big Banks’ Derivatives

One of the newer private money funding options in recent years is something known as “Crowdfunding” in which an investor solicits contributions from either a small or large number of people, which usually originates from the online community. Crowdfunding has been used in the past from many start-up businesses seeking cash to fund their business ideas partly since business loans from their local bank branches were quite challenging to qualify for in recent years. Crowdfunding has also been used by many Charities to either raise awareness for more individuals or groups of people, or to help pay the Health Care costs for friends and family members in need. Crowdsourcing, in turn, has been used by computer designers to share free software code, or other ideas which benefits all parties.

Even though some financial analysts and Economists have said that the implosion of the “Sub-Prime Mortgage Loan Bubble” was one of the main catalysts for the financial meltdown, the “Credit Crisis” is truly directly related to the near popping of “The Derivatives Market Bubble.” It has been suggested by a fair number of people in the financial industry that the size of the “Derivatives Bubble” (i.e., Credit Default Swaps, etc.) worldwide is somewhere within the 1,000 to 2,000 + Trillion Dollar range. As a comparison, the size of the outstanding U.S. Student Loan Debt just recently surpassed $1 Trillion, and the size of the U.S. Budget Deficit is alleged to be approximately $17 Trillion Dollars.

It has been reported numerous times that many of the Big Banks here in the USA have Derivatives obligations which far surpass the market value of their entire parent companies by a very high number. It has also been reported that 2014’s Derivatives investment dollar amounts for many of these same Big Banks are now at least 20% higher than back in 2008. If true, then aren’t the Big Banks now potentially financially weaker today than back near the start of “The Credit Crisis”?

Crowdfunding has evolved in recent years to become one of the best options for people to invest in Real Estate, either directly or indirectly, after the financial markets effectively “froze” once the “Derivatives Bubble” almost completely popped back in 2008. In effect, Crowdfunding has eliminated the “Middleman”, or the Banks, and allowed individual investors to invest in discounted Real Estate assets for potentially a fraction of the current or future market values. One of the best solutions for Real Estate Funds as it pertains to the “popping” and “frozen” financial markets has been to work with individual investors directly and much more efficiently. This helps all parties focus on the best ways to generate profits with a true “Win/Win” mentality.

Who Reaps The Profits: Banks or Investors?

Instead of the Big Banks reaping all of the financial rewards related to their own Real Estate investments while still providing their bank customers interest rate returns of between just a measly 0% to 1% interest, Crowdfunding, and other private equity or debt options, allows the investors to share in the profits too. Crowdfunding typically offers Debt or Equity investors a variety of investment options and financial solutions with seemingly fewer risks and much higher returns than with investing their funds with their local bank branches, ironically.

In parallel with quicker lending or investment options, more buyers and sellers are matching up online through the internet, Social Media, real estate networking and investing groups, and with better access to real-time Big Data, and then are flipping and closing their home sales in a matter of a few days as opposed to a few months. These quick online home flips are somewhat akin to “Day Trading” stocks. Without the more efficient access to private capital and online real estate information, then the quickest “Fix and Flip” deals may not be as possible today.

In today’s ongoing “Credit Crisis World”, it may be more likely that an individual neighbor, a group of neighbors or townspeople, a Crowdfunding group, or a private funding company may help fund a person’s business idea, charity, dreams, or real estate investment options rather than their local bank. In any “Boom or Bust” Housing Cycle, it is truly the access to capital which typically drives the directions of the housing markets either up or down.

Hopefully, more U.S. Banks try to later follow more logical, efficient, and rational underwriting methods used by Private Money lenders or investors so that access to money becomes easier for more Americans.