Like many business sectors, real estate investing is shifting toward an online market. That includes lending products such as bridge loans and hard money loans. Some of the factors influencing this shift are outlined below.
Hard Money Loan Versus Bridge Loans
Hard money loans are alternatives to conventional loans where private funding is secured by the value of the property loaned against. This typically leads to a faster closing for the loan as the lender isn’t as concerned with performing due diligence on the borrower as she is with ensuring the property is a sound risk.
Bridge loans are short-term loans used to aid in the purchase and renovation of real estate. They can be used for the down payment on a new home while awaiting the sale of the old home, or they may be used to acquire and renovate an investment property when the risk is too high for traditional lenders. The bridge loan “bridges” over the time between when the borrower buys the property and when he or she can put more permanent financing in place.
A bridge loan can be a hard money loan, but it isn’t necessarily the case. The fact that more hard loans are funded by private investors means they work perfectly in marketplace lending.
5 Reasons Why Bridge Loans and Hard Money Loans Perform Well Online
- Online lending is speedy and efficient – Technology cuts costs and makes the lending process more efficient by reducing steps and streamlining the path from application to underwriting.
- The JOBS act of 2013 – The JOBS Act of 2013 updated the Securities Act of 1933 by allowing emerging growth companies, job creators, and startup enterprises—including real estate companies—the ability to raise capital by publishing public calls and raising funds through online platforms. By recognizing the validity of the marketplace lender, the JOBS Act paved a new path for equity crowdfunding, debt and equity real estate fundraising, and other fundraising similar to these. The JOBS Act also expanded the pool of investors by paving the path for non-accredited investors to participate in these funding calls.
- Artificial intelligence and machine learning – Artificial intelligence (AI) and machine learning (ML) technologies allow companies to cut costs, assess risk, predict loan defaults and offer deal matching insight without relying on human blood, sweat, and tears. AI and ML algorithms can process thousands of gigabytes of data in a shorter time frame than humans can analyze a couple of dozen.
- Millennials have buying power and are comfortable with technology – Millennials are now the largest living generation alive. Having grown up with computing technology at their fingertips and coming of age with mobile technology entering the mass adoption phase, the youngest adult generation is very comfortable using technology for many tasks that older generations do not yet feel comfortable with. That’s why the millennial generation is the first generation to adopt mobile banking applications. They are also comfortable with borrowing money through online platforms.
- Banks have shut the door on small businesses – After the financial crisis, banks cut down on small business lending. That included loans for commercial real estate, bridge loans being one of the big slices of the lending pie. Online platforms arose to fill this need for small businesses offering everything from merchant cash accounts to bridge loans. It was only natural that hard money loans for small and individual investors would follow.