In the wake of COVID-19, new lending trends are emerging in the bridge loan market.

In March, COVID-19 disrupted everyone’s daily life. From curfews and lockdowns to wearing a mask in public, to schools and workplaces shutting their doors and moving to virtual formats, everyone’s personal and business routines changed. The real estate industry did not walk away unscathed either.

Because the industry was navigating uncharted territory, private lenders approached these new market challenges with different strategies. 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. The other was to maintain lending with very strict and specific guidelines.

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

The Comeback Kid

Due to its ability to provide quick turnaround times and competitive pricing, bridge financing has always been, and will continue to be, a great resource for real estate investors. 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 as a rental property or a flip, to be relisted in this fast-paced market. 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 for investors looking to acquire additional investment properties.

Realtor.com®’s October Housing Data Release revealed that nationally a typical home for sale spent only 53 days on the market. That is 13 days fewer than the same time in 2019. For the first time in Realtor.com’s records, in 2020, homes sold faster in October than in September. That 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.

Something to keep in mind when determining an investment strategy and when to utilize bridge financing: Inventory of newly listed properties has declined by more than 7% 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% over 2020, to $350,000 in October. This is up from the 11% growth seen in September. Bridge financers can speed loan closing for investors in a competitive market.

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%. Those rates are lucrative when you consider how swiftly the bridge loans can be acquired.

As stated previously, properties are spending, on average, only 53 days on the market, creating a fast-paced and competitive environment for investors. Working with bridge financers to purchase properties allows investors to close on these properties much faster than conventional funding, typically in just 7-15 business days.

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

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. When you add multiple inspection reports for rehab draws, a project’s timeline increases substantially. Given this situation, short-term bridge loans for fix-and-flip projects are not as lucrative now as they were in January and February.

This does not mean investors are walking away from bridge financing altogether though. In fact, just the opposite is true. Real estate investors are simply 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 toward acquiring and holding long-term rental properties to build their portfolios, private lenders have adjusted how they market their short- and long-term bridge options to attract more clients.

According to the Mortgage Bankers Association’s weekly report, refinance applications increased 6% from the week prior or a full 88% higher than this timeframe in 2019, all due to folks looking to lock in these historically low rates.

With preferences changing about what is important to have in a home (e.g., a backyard area and a designated home office), renters are flooding the market, presenting an immense opportunity for investors to become landlords.

According to the Urban Institute’s Housing Finance Policy Center, single-family homes for rent are the fast-growing sector of the U.S. housing market, with an estimated 3.4 million millennials preferring to rent rather than buy a home during these unprecedented times.

Looking Forward 

What happens going forward is really going to depend on how the economy continues to recover. Recovery, of course, is contingent on the development of a COVID-19 vaccine and not having another major economic shut down.

With the way the industry is moving forward now, it is anticipated that bridge and longer-term loans will continue to be in high demand, as investment properties are increasingly more desirable and home values continue to rise into 2021 and beyond.