Instead, diversify your capital and dial into a stable volume vs. margin strategy.
As Oscar Wilde once said, “expect the unexpected.” This phrase eloquently encapsulates the private real estate market.
Striking the right balance between flexibility and rigidity is crucial. A firm foundation of sound business practices ensures successful underwriting, even in the face of market volatility.
The Risk of Relying on a Single Capital Source
When building a business, it’s essential not to rely solely on a single capital provider or line of credit. That institution could decide it has exhausted its funds, leaving all your pending loans, whether five or 500, in jeopardy. Diversifying your funding sources provides the flexibility and adaptability needed to consistently close quality loans, regardless of unforeseen challenges.
Your organization must be prepared: Have plans and think through scenarios. There are two fundamental ways to make money in our industry: high volume with low spread or lower volume with higher spread. Not a single company that does high volume with high margins has ever succeeded. Run as far away as possible if someone ever tells you they do that. In fact, companies that do run on riskier business models have never failed to go under.
Why? Because of market volatility. We never truly know when the market will rise and fall; however, we do know it follows a cyclical pattern and is bound to happen. The second the market turns, those companies seemingly go under overnight, stop lending, leaving hundreds unemployed—uncertain about where their capital stands until the market turns right again.
Is It Possible to Predict the Market?
When it comes to predicting market trends, my Financial Investment 3000 professor taught us that top analysts spend 100 hours a week and get paid the big bucks to make financial decisions to outperform the market, only to get beaten by a monkey throwing darts at a dart board.
That’s not to say you should go out and purchase a dart board, but there is some truth behind the logic. The last quarter of 2024 saw interest rates and loan amounts drop across the board, in 38 of 50 states. This directly ties to what the Federal Reserve does nationally, even if we are in the private real estate industry.
At the same time, local market variability plays a crucial role in determining real estate trends. While many lenders market themselves as “national,” the reality is that 95% of their portfolios are composed of local loans, with only 5% spanning broader regions.
Why? Because nobody knows a market better than those who are in it.
Adjusting to Market Shifts
Even though rates dropped across the board, just over 10% of states are still seeing rising rates. Sometimes lenders cannot combat rates because they must remain competitive. However, a common strategy among lenders is to increase the number of points charged to the borrower. For example, in Michigan rates dropped from 11% to 10%; however, the average points increased from 2 to 3, allowing lenders to maintain their overall take-home revenue. This illustrates how lenders adapt to market changes—shifting their pricing strategies to remain profitable despite rate fluctuations.
Although perfect market predictability remains unattainable, adopting strategies that would have worked for successful lenders can help organizations lend with greater confidence.
Diversify your funding sources. Relying on a single capital provider increases risk. Instead, lenders should establish multiple funding relationships to ensure liquidity during market shifts.
Hold and sell loans strategically. Maintaining a balance between held and sold loans provides financial stability and flexibility.
Leverage technology for smarter decisions. A loan origination system (LOS) that prioritizes data-driven insights can help lenders track market trends and borrower behavior effectively.
By fostering flexibility, maintaining sound underwriting practices, and embracing innovative tools, lenders can position themselves to thrive in any market. In real estate lending, expecting the unexpected isn’t just advice—it’s a necessity for long-term success
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