Following up with last week’s post on home flipping with data sourced from Attom Data Solutions, we’re looking at how private lending is impacting the house flipping business.
According to the for-profit group American Association of Private Lenders, it’s estimated that a number of “hard money lenders,” lenders other than banks such as Goldman Sachs and Blackstone that carry higher interest rates, are charging residential borrowers rates as high as 12%, an increase of nearly 40% since 2016.
“There is a lot of activity,” said Glen Weinberg of Fairview Commercial Lending. In fact, the volume of loans to people who are buying houses to renovate and resell increased some $20B in 2018, according to Attom. This number is up from 37% in 2016 and almost double the figure compared with 5 years ago.
Weinberg’s business loans of to 60% of property value to borrowers. Other lenders loan up to 90% of property value.
Blackstone and Goldman Sachs get interest rates of 8%-12% plus two or three percentage points tacked on for the lender. KKR is upping its investment to Toorado Capital Partners from $200M to $500M this year. (Toorado Capital buys short-term flip loans from originators.) And, according to founder Brian Dally, Atlanta’s Groundfloor Finance Inc. is gathering up thousands of small investors and loaning them approximately $12M/m.
Some industry observers view this type of hard money lending for flipping as worrisome. Why? The surge in housing prices drove down the average ROI per flipped houses to 39% in Q1 2019, an 8-year low according to Attom.
Even Groundfloor’s Dally said that flippers cannot count on finding move-in ready houses anymore. “Those houses have already been sold off so it’s older houses needing extensive repairs plus more time and money to do those repairs.”
Jeffrey Tesch, managing director of Connecticut-based RCN Capital, said that luxury California houses are too pricey to flip but that lower-end homes are not. RCN is loaning approximately $500M this year for lower-end flips. “For us, business is better than average, but it (RCN’s business) is in the workforce housing segment.”