Marketplace Lending, where borrowers can quickly and easily apply and get a loan from online loan originators, is now much more than just consumer lending. Consumer loan originators Prosper and Lending Club pioneered the idea of online lending roughly 10 years ago, and, along with others such as Social Financial (“SoFi”), Avant, and Marlette continue to provide a valuable service to millions of American consumers annually.
Today, online lending to both consumers and small businesses continues to grow in acceptance and popularity, thanks to applied technology that has enabled a smoother, quicker, and better experience for the borrower relative to traditional lending.
Real estate lending has also gone online and continues to flourish for the same reasons. Partially because of the appeal of their enormous market size, consumer and small business lending have more operating history than online real estate lending but are no more sophisticated. Additionally, in the later development of online real estate lending not all documentation for a real estate transaction is available online in all areas, keeping more of the lending process manual rather than automatic. Regardless, technology has made many aspects of real estate lending faster, more consistent, and more transparent, and in doing so has created an opportunity for investors to more easily and confidently own or lend against real estate.
Why Marketplace Lending?
Real estate marketplace lending adds a modern approach to the current real estate investment options such as mortgage-backed securities, real estate investment trusts (REITs) and directly held real estate. By working with online platforms, accredited investors can review individual properties which include current photos and appraisals, and electronically complete all associated paperwork. And just like with consumer and small business marketplace platforms, investors can create their own custom portfolios of loans or properties to diversify their overall holdings.
There are a growing number of online real estate platforms and, combined, we estimate that they originated well over $1 billion in loans in 2016. Examples of these platforms include ShareStates, Patch of Land, Realty Mogul, LendingHome, and Money360, to name just a few. They all differ in their property type emphasis, geographic region, and underwriting approach. Some have been around longer than others, and all have their strengths and weaknesses. Most provide access to short-term (12 month) bridge loans to residential fix-and-flip developers, who continue to grow their businesses due to the lack of affordable housing supply. Others are focused on commercial and multi-family purchases and rehabs, and use loans that bridge them to a refinance upon reaching certain occupancy or other sale terms.
Unlike other more traditional real estate options, loans from these platforms can be combined, when done correctly, to achieve many different investment objectives such as:
- Commercial, residential, and multi-family property types
- Loan to value < 75%
- 1st lien only
- National geographic diversification
Full or fractional loan interests are available on most real estate lending platforms. For fractional loan buyers, most platforms use the same Borrower Dependent Note structure that online consumer lenders such as Lending Club use. These notes are issued by special purpose entities set up by the platforms, and are bankruptcy-remote so that property title and interest payments are processed independent of the platform.
Historically, investors have been limited to regionally concentrated, non-transparent private real estate funds. To create a nationally diversified portfolio using this approach can take a substantial amount of capital to achieve the same level of geographic and property-type diversification as a transparent marketplace lending portfolio.
The U.S housing market demonstrated strong growth over the past year. Price appreciation accelerated from 4.9% to 5.3%, existing home sales outpaced 2015 by almost 3%, new home sales were up 13% and housing starts were up 6%. We expect this positive market environment to continue in 2017, supported by demographic trends of increasing demand that should, in turn, support more renovation and new construction of most property types.
For the rehab market, aging inventory (more than half of the U.S. housing inventory is over 35-years old) continues to be an opportunity for developers, and more and more of these developers are turning to real estate marketplace lending platforms for funding because of their fast and reliable services.