Today the U.S. housing shortage is roughly 5 million units. With construction of new single-family homes sitting at its slowest pace in almost 30 years and the median age of homes hovering at nearly 40 years, the situation is dire.
What’s more, renovations are difficult for individual homeowners to finance and the average tenure in a home has risen to nearly 14 years, which means that many houses are not maintained to current homebuyer standards. Given that nearly one-third of these units require repairs, the nation’s real estate inventory needs rejuvenation.
Clearly, the high demand for housing and the low supply of turnkey options demonstrate a need to create new homes. There also is a need to increase the maintenance and rehabilitation of existing housing inventory in order to transition these properties into like-new condition.
Now is the time to ramp up residential transition, or fix-and-flip, activity. Luckily, the market is primed to support this. The COVID-19 pandemic created one of the most challenging markets ever for buyers and squeezed out many investors. But the mortgage industry is entering a cycle where interest rates are increasing, leading to a slower pace of home purchases. Commercial mortgage brokers and their investor clients now have greater opportunity to source more product for these fix-and-flip rehab projects.
Home’s changing role
When entering this investor-friendly market, how should mortgage lenders, brokers and developers look to meet the needs of today’s homebuyers? Before the pandemic, millennials and members of Generation Z largely viewed their residences as simply a place to sleep and eat some (but not necessarily most) meals.
They focused on their prospective home’s local amenities, such as nearby restaurants, bars and public transit options. This demographic was often attracted to multifamily housing communities that offered shared amenities such as gyms, rooftop decks and dog runs.
Experienced mortgage lenders will understand the project itself — beyond the budget — and can assess its likelihood of success while providing guidance.
The pandemic, however, has largely shifted this perspective. Many of these trendy multifamily amenities were closed during the health crisis and residents are now recognizing the importance of having control over their own space. These coming-of-age Americans are shifting into first-time homebuyer mode sooner than they otherwise may have — and with heightened demands for their first homes.
Pandemic-era workforce dynamics have dramatically increased the importance of working from home, making space and privacy paramount. People now expect to spend much more time in their homes, so they view modern features, new appliances and other touches as need-to-haves as opposed to nice-to-haves.
Set these factors against the backdrop of a seriously deteriorating real estate inventory and homebuyer frustration becomes palpable. By the time they are shown a home, prospective buyers are stunned that a minimally preferred option already has 20 offers at $20,000 over asking price. This is untenable.
A good partner
Yet as interest rates climb, the market is wilting for individual buyers and ripening for investors who can leverage volume and agility to maximize profits. Pandemic-driven market mitigations have opened further opportunity for investors into areas that may not have been previously profitable.
As remote and hybrid employment becomes the standard, suburbs, exurbs and rural areas outside of urban cores are seeing an influx of residents who want more space for less money. The buyer pools for these areas are growing, meaning that market fundamentals are becoming more favorable and investments in these areas have become less risky.
Unfortunately, rising construction costs and labor shortages provide little room for error with fix-and-flip projects. This is where partnerships come into play. Experienced mortgage lenders will understand the project itself — beyond the budget — and can assess its likelihood of success while providing guidance.
Financing partners know that by supporting a successful project, they open the borrower and themselves to more business opportunities in the future. Strategic lenders and brokers will guide the investor through every step — from running an evaluation of profitability to delivering a detailed budget analysis — and also will make recommendations on financial pivot points throughout the lifespan of the project.
New product arsenal
Today’s market is perfect for savvy investors who are unfazed by hard work on a project with significant potential. In the era of reality TV, it is easy to assume that the only elements required for a successful fix-and-flip project is two guys in flannel shirts, a couple of sledgehammers, some shiplap and a ring light.
Fix-and-flip investors are relying heavily on financing partners that offer competitive terms, creative and structured underwriting, and certainty of execution. Continued, intentional success with real estate rehabilitation projects takes time and experience. It requires institutional knowledge of how to find the red flags when assessing a fix-and-flip project. These warning signs may include a cracked foundation, which could completely derail a project’s budget. In particular, first-time investors need a lending partner who can leverage personal experience to provide guidance.
As the market enters a new phase, opportunities are ripe for commercial mortgage lenders and brokers to maximize conditions by adding new products to their arsenal. Residential bridge loans (also known as fix-and-flip loans) can help to close the gap in lost production and income. Amid rising interest rates, owner-occupant home purchases have slowed and refinance applications declined by 45% during a recent six-month period.
And the cooling real estate market has done more than just slow purchase activity. This ripple effect has impacted the financial prospects of many lending institutions. After residential mortgage lenders ramped up their workforce over the past two years to keep up with the rapid pace of homebuying, the industry is now seeing an across-the-board need for layoffs.
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Now is the time for lenders and brokers to shift their business approach and significantly help right the ship for U.S. housing inventory. Real estate investors have tended to be more conservative with their funds in recent years and have been waiting on the sidelines for this moment. Homebuyers are looking for turnkey options, and by helping investors create a home that will look brand new, lenders and brokers can ensure that clients attract buyers with the highest and best offers.
Business-purpose financing can serve as the catalyst for a return to real estate stability in the U.S. With solutions such as bridge loans for dynamic and capable investors, everyone from lenders, brokers, investors and homeowners stand to benefit from what lies ahead for the real estate market. ●
