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Wall Street moves into commercial lending for investment properties

A new breed of nonbank commercial lenders has cropped up that has changed the way investors are purchasing single-family homes for rentals.

In the past, investors often used cash or borrowed from a hard money lender. A few nationwide companies backed by Wall Street are now lending specifically to investors in single-family rental homes.

“There are several lenders that have jumped into the space,” said Anthony Cazazian, vice president of B2R Finance, a lender backed by the private equity company, The Blackstone Group.  

We are providing mortgages to investors of this asset class, pooling those mortgages and securitizing them through a capital-market execution. That is a new form of financing for this asset class.”  

Colony American Finance, which grew out of the real estate investment company Colony American Homes, and FirstKey Lending, which is owned by the private-investment company Cerberus, also began lending nationwide within the last 18 months. Cazazian said the market was fragmented and inefficient with choppy sources of financing and a high percentage of cash sales. Also, the demand for loans was there. Investor-owned properties total as many as 15 million nationwide.

“The real impetus for us was just a tremendous gap in terms of available credit and the single-family rental and single-family investment space for financial real estate investors,” said Ryan McBride, chief operating officer at Colony American Finance. “So, we had access to capital from our Wall Street sources, from the banks we work with. So we saw an opportunity to provide liquidity to the smaller and midsized operators.”

The companies offer five- to 10-year commercial loans backed by the property and anticipated rents, or offer lines of credit for fix-and-flippers. Colony American Finance reported that its loans range from $500,000 for the mom-and-pop investor to loans of $60 million for large, institutional investors, whereas B2R’s reported range is $300,000 up to $100 million. B2R said, however, that the majority of its loans are geared for smaller investors who need under $2 million.

All cash sales are down

The rise of these lenders also has come as large institutional investors are buying fewer properties and all-cash purchases dropped off nationally to a four-year low, RealtyTrac says. Smaller investors who buy fewer than 10 homes a year have stepped up their activity, said RealtyTrac’s Vice President Daren Blomquist. These new national lenders have been useful in providing loans to them, he said.  

“We’re seeing with those specific investor purchases, the share of financed transactions is going up and the share of cash is going down,” Blomquist said.  

Despite the presence of these new lenders, it still is difficult to get financing to rehabilitate homes, said Tom Zeeb, who does home-flipping seminars across the country and sits on the board of the National Real Estate Investors Association. Zeeb said the fix-and-flip investors are still typically going to a hard money lender or purchasing in cash.  

“We have some guys that operate on a multistate level that do hard money lending or private money lending so investors can rehab properties,” Zeeb said. “It is always difficult with the normal, traditional bank lenders, just because the conditions of the properties we deal with aren't what they want to lend on.”

The lenders also didn't know if the decline in cash sales is related to more financing sources.

“Certainly it was a cash game to start,” McBride said. “We always make sure that investors have cash in the deal when we fund debt behind them on purchases. So, it is hard for me to tell what the shift has been in terms of magnitude. It certainly doesn’t surprise me that investors are now buying homes [with] a mixture of their cash as well as debt provided by guys like us.” 


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