- Until a few months ago, debt for home flippers was cheap and plentiful.
- Now, higher interest rates have forced fix-and-flip lenders to charge more and raise their standards.
- Big investors don’t want to buy back loans taken out months ago, causing problems for lenders.
Until just a few months ago, investors were clamoring to buy stakes in huge pools of loans to home pinball machines.
Fix-and-flip activity was booming, thanks to historically low interest rates and a rapidly appreciating real estate market. For home flippers, money to fund rehabilitation projects was cheap and plentiful.
Not anymore, thanks to the Federal Reserve’s efforts to calm inflation by raising interest rates.
Private lenders are now forced to charge pinball machines higher rates for short-term loans, reducing the profit a pinball machine can make on a home. Lenders are also tightening their standards, favoring those with experience and the ability to invest more of their own money.
In short, it’s hard to be a pinball machine if you’re just getting started and have little cash on hand. Investors flipped nearly 115,000 US homes in the first quarter of this year, representing nearly 10% of all home sales, according to Attom Data Solutions. Flipping hasn’t been this popular since before the Great Recession. But now home flippers are facing increased competition for bids, higher costs for materials and labor and shrinking gross profit margins, according to Attom.
However, many transactions are still ongoing. For pinball machines who have gone through extensive rehab or patiently waited for the housing market to cool, opportunities to close even more deals could be on the horizon.
Wall Street dictates how easy it is for home flippers to borrow money
The biggest players in fixed and reverse lending — companies like Toorak Capital Partners, Churchill Real Estate and MFA Financial — are buying up loans from smaller lenders, bundling them into portfolios worth hundreds of millions of dollars, and selling them off. income stream in the form of bonds. in a process known as securitization.
Now these companies find that Wall Street’s appetite for underwriting these deals has dried up.
Fixed and reverse loans can range from around $50,000 to over $1 million for larger projects.
Bond investors on The Street are reluctant to redeem these loans at the moment, as many were made months ago when rates were significantly lower. That’s a big deal for the $75 billion-a-year door-to-door sales industry, which relies heavily on securitizations to keep money flowing from big investors to private lenders, and from lenders to individuals.
“This is a much bigger industry than a lot of people realize,” said Ray Sturm, co-founder and CEO of AlphaFlow, a company that buys fixed and reverse loans and routes them to Wall Street through the securitization bias. “If you are a landlord and you want your neighborhoods to continue to be built, they are the ones who do it. This is where they will finance their projects.”
Debt is still available to flippers, but some private lenders have slowed their lending pace or stopped due to a lack of capital. Most are seeking other capital flows and tightening their lending standards, favoring flippers with track records and more of their own money to invest in projects.
For some pinball machines it’s business as usual
Jeff Onofrio, a Cherry Creek Mortgage executive in New Jersey who flips homes on the side, said he’s been able to maintain four or five repair and flip deals at once thanks to the funding he gets from BRRRR Loans, a private lender whose name refers to the popular real estate investment strategy of buy, rehab, lease, refinance and repeat.
“There will always be someone ready to lend money,” Onofrio said. “They’ll just be a little stricter. They’ll make it a little more expensive, and maybe they’ll put some extra guidelines on it.”
Recently, Onofrio was asked to provide a personal financial statement when applying for a loan, which he said he had never been required to do before.
He added that first-time fins would face significant challenges in this environment.
“Someone with no experience comes in and tries to do it, they’re going to have a harder time,” Onofrio said, adding that lenders will prefer to work with “guys who have experience and know what they’re doing and have done for a while.”
Inexperienced fins still have options, said Alex Offutt, managing director of private lender Constructive Capital.
“If a first-time pinball machine wants in, they’ll have to put in more money and they’ll have to take a slightly higher rate,” Offutt said. “Now, are there still opportunities? You bet. No question.”
Rising interest rates dampen ‘endless’ liquidity
The unprecedented rise in interest rates since April has left private lenders fix-and-flip with loans on their balance sheets that are difficult to offload through securitization, as bond buyers now demand higher yields. high to match higher interest rates.
Investors believe that the flipping industry will continue to generate profits – there is just a price mismatch over rates.
Six months ago, an average consumer could get a one-year bridge loan at around 8.5%. It’s now up around 10.5%, Eric Abramovich, co-founder and chief credit officer of fix-and-flip lender Roc360, told Insider.
These days, Abramovich said, end investors buying these loans want to earn a return of around 9%, and the lender needs to earn a few percentage points on the deal as well.
“That means borrowers have to pay more than 11% to make everyone happy,” Abramovich said. “It’s a tough pill for borrowers to swallow.”
Sturm said a robust market for fix-and-flip loan securitizations over the past two years has made liquidity “endless.” Now, as the big players try — and fail — to commercialize these loans as securitizations, capital pipelines are cut.
That might puzzle swimmers who aren’t used to being denied loans, Sturm said.
“When securitizations stall so quickly, even some of these good projects have been difficult to fund,” Sturm said. “That doesn’t mean they aren’t good projects. It just means the funding wasn’t quite there.”
There is also good news for fins
As the real estate market has boomed over the past two years, one of the biggest challenges for home swimmers has been finding inventory. They were competing with many new pinball machines that had been lured by cheap debt and rising house prices.
Now that the housing market is cooling and these loans are harder to come by, experienced divers will have more of an advantage.
Lenders with reliable sources of capital outside the securitization market will continue to lend, Offutt said. Constructive Capital, for example, derives its funding from its relationship with a large life insurance company that must invest billions of dollars each month, he said.
Joel Kraut, co-founder and managing director of BRRRR Loans, said he welcomes increased competition and the opportunities that come with higher rates.
“Now you really have to make sure you’re investing and not just spending money,” Kraut said. “Now more than ever, it’s going to show.”