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Home flipping fuels boom in short-term lending

Investors in the business of buying and selling homes fast have faced stiff competition in finding viable properties, but these home flippers have had fewer challenges in one traditionally tough area of the business: lining up financing.

Lenders have been competing fiercely to fund their deals.

homeflippingA deeper bench of private lenders is now operating in the fix-and-flip space, including several large national lenders. The end result is that the cost of the short-term loans used by home flippers has been dropping, and the percentage share of financed home flips has increased.

“There has been a huge sophistication of this marketplace,” said Whit McCarthy,  director of sales and business development for the Redondo Beach, California-based Civic Financial Services. “Historically, hard money or private money has been an industry that has really lived in the shadows, dominated by these mom-and-pop shops that have $5 million to lend, clipping 12 percent on their money. Players have emerged, us being one of them, providing a more institutional approach. We actually have capital market teams that negotiate financing with Wall Street banks and firms.”

Civic Financial was spun off in 2014 from the property investment company, Wedgewood Inc., which flips roughly 5,000 homes annually. McCarthy said the heavy competition has worked to the advantage of the flippers. The rates and points have dropped. Home flip loans traditionally are interest-only loans that pay off in full within a year. Experienced flippers are now offered rates in the range of 8 to 8.5 percent, whereas the standard a couple of years ago typically started at 10 percent or higher.

The booming housing market has created a strong home-flipping market over the past three years. Last year, more than 200,000 homes were flipped, an 11-year high, according to preliminary data from Attom Data Solutions. Significantly, the percentage share of financed home flips also increased. Last year, the share of financed flips was estimated at nearly 35 percent, a nine-year high.

Home values have hit new peaks in several markets, which is good news for flippers who make a profit by buying low and selling high. A shortage of low- and median-priced homes also has meant that listings are selling in under a month in some cities.

Market conditions for fix-and-flippers are not perfect, however, according to analysts. On the downside, there are significant housing shortages that have made viable home flips less readily available.

Fierce competition and dropping rates have driven some hard money lenders out of the fix-an-flip market. The online commercial platform exited more than a year ago, after once committing $1 billion in capital. In an online posting to its investors, the Los Angeles-based company said the average return on a fix-and-flip loan had dropped from 11 percent to 7 percent, including servicing expenses. The company said it planned to deploy its capital into short-term bridge loans for maturing loans in commercial mortgage-backed securities. 

Here to stay 

Other national lenders say they are in the market to stay. Brookview Financial, which has been doing fix-and-flip loans for 25 years, was among the few national lenders that continued to originate short-term loans after the financial crisis.

“This is not an easy product to finance,” Brookview Chief Executive Officer A.J. Funaro said. “The duration is short, not subject to securitization. Typically you have a lot of handholding … with regard to the improvement. There is a lot of administration that goes along with it, and the market is only so big, depending on who you talk to, and your analyses. 

“At some point, the market gets saturated,” Funaro continued. “But then what happens? It is the old supply and demand curve. Eventually, it will reach an equilibrium. If the Wall Street firms say they can only get a certain amount of yield for it, then they go elsewhere.”

Funaro said not all the players in this crowded field are competing for the same customer. Some of the Wall Street companies will only lend to the safest borrower with experience and a strong credit profile. He said Brookview has stayed true to its roots of closely evaluating the asset value and serving investors who may not necessarily have vast experience in flipping homes.

“I don’t think the number of [financing] sources is necessarily more,” Funaro said. “In everybody’s backyard, there was always the private lender. Wall Street has come into the fix-and-flip market, and maybe one day Wall Street will begin to exit the fix-and-flip market.”

A relatively recent entrant, Atlanta-based GroundFloor, has placed a bet that home flipping will remain a viable business through the next market downturn. CEO Brian Dally said that “flipping” is often used negatively, but he views the typical flipper as an entrepreneur who recognizes the value of a home, and then increases it.

“We are not interested in the transactional fix-and-flipper who just wants to make a quick buck,” Dally said. “We are interested in the client who is a real entrepreneur, who is really building something that the end consumer wants. There is always a market for that.”

GroundFloor launched in 2013 and has developed an online platform for borrowers and the investors who bankroll the loans. Dally said its national reach has enabled the company to cast a wide net for investors and enabled it to lower its rates.

“Almost a third of flippers are using financing, and the No. 1 driver of that is that now they realize it is more available,” Dally said. “Since the assets have a real value behind it, why shouldn’t they be financed? What is key is, do they have to be financed under onerous terms?”

Dally said that the national lenders have filled a void left by community banks, which once funded a large percentage of fix-and-flip projects, but left the space after the financial crisis. He expects the share of financed flips to continue to increase.

“Now it is not only easier to find financing, it is easier to find it on good terms,” Dally said. “That is what is new.” 


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