Equity Gap Funding in the Fix-and-Flip Market

Flipping houses is becoming a greater challenge as rising home prices and stiffer competition hamper profits. Home flippers can continue to succeed in this market if they practice their craft with discipline, and private real estate lenders have a great opportunity to tap this market as well – and when private lenders have opportunities, there’s plenty of opportunity for real estate investments.

Home flipping has had a recent boom in popularity. This is in part due to the fact that many people saw opportunities in the bargain home prices that appeared right after the housing crisis. More recent arrivals to the scene may have been enthralled by reality television shows that make the fix-and-flip process seem quick, simple and guaranteed to be profitable.

Fix-and-Flip Market Today

Regarding the heightened competition in the fix and flip market, ATTOM Data’s Daren Blomquist, who collates data on home flipping every quarter for the data firm, noted that the number of individuals or groups flipping single-family homes had hit a decade-long high of over 43,500 in the first half of 2017, the highest number since the second quarter of 2007.

With rising prices and growing competition, the total inventory of affordable homes available for purchase is shrinking. The United States was in the grips of a foreclosure crisis until September 2010, during which around 120,000 foreclosures occurred in a single month according to CoreLogic data. Since 2007, there have been around 7.8 million completed foreclosures in the United States. Serious delinquency and foreclosure rates hit the lowest levels in more than a decade just this last year, signaling that the housing recovery is finally on solid ground.

Distressed properties have always been a major target of acquisition for home flippers. About 39 percent of flipped homes are purchased in the foreclosure process or as REO—a percentage that sits far lower than it did in 2010 when it was as high as 70 percent according to ATTOM Data. Flippers seek out pockets of distressed housing like this because these regions tend to also boast strong rental markets, which provides flippers a regular source of demand from buy-and-hold real estate investors who seek out turnkey renters.

The nation’s rejuvenated housing market is an excellent sign for flippers: The trend of increasing home prices has steadily persisted, and that has provided a hedge that helps flippers after the fix when they are hoping to sell the house and move on. However, those rising prices also increase the entry fee for potential new flippers – it’s hard to get started if the buy-in for the practice is prohibitively expensive!

Those who just use cash for their home purchases will be severely limited by rising home prices, but flippers that use financing will have the chance to leverage and expand their flipping portfolio at a considerably faster rate.

Real Estate Lending for the Modern Era

About five years ago, new types of lenders entered the marketplace and provided a creative spin on the traditional real estate financing that has been expected for flippers. These finance products include refinances, bridge loans and crowdfunding. The greater competition among lenders seeking out real estate investors, along with the increase of advanced technology and algorithms utilized by online lending platforms has also decreased the cost of borrowing.

This is excellent news for the modern real estate investor, who has gained additional financing options at a lower cost. These innovative financial products have re-energized the home fix-and-flip market over the past half-decade while also widening access to real estate financing. The proliferation of online lending platforms has offered flippers access to a new source of financing that doesn’t care where they live or where their flipping work will actually take place.

More than a third of house flippers used financing options on their 2016 and 2017 projects. In the second quarter of last year, that number grew even higher, becoming the highest since the third quarter of 2008, according to ATTOM Data.

Flipping used to be financed very differently. Ten years ago, an average hard money loan would come with an interest rate of 15 percent or more, and financing options would be restricted to those lenders who were local. Modern investors have access to short-term rehab loans with interest rates in the single digits and have much wider options since most internet loan companies offer loans that take only a week or less to access the needed funds.

Getting Ready for Tomorrow’s Real Estate Market

There is some excellent news on the recent jobs and wage gain front. Hourly wages rose 2.9 percent in January, which is the largest increase since 2009. Unemployment didn’t move at all and remains at 4.1 percent. However, the number of workers that filed for unemployment claims decreased to the lowest point in 45 years in February. Together, these economic signs demonstrate the prospects of additional wage growth this year, which should work to enliven the real estate buyer market.

Home flippers and the private lenders they rely on will still need to employ innovative strategies to stay at the head of their game, even if the market is becoming more friendly. Some tertiary markets have outperformed large metro areas, and are ripe for flippers’ time and interest.

The markets that saw the largest increase in home flipping over a year ago were solely in tertiary markets. Baton Rouge, Louisiana, saw the largest annual percentage changes at almost 140 percent, but Winston-Salem in North Carolina followed at 58% and Salem in Oregon increased by over 50% as well. Buffalo, Tulsa, Greenville, and Chattanooga similarly saw a large increase in fix-and-flip activity, and are all tertiary markets as well.

If the momentum behind this tertiary market trend continues through 2018, then private lenders will grow more and more interested regardless of the site of the market. With advanced real estate financing technology, lenders and investors alike will be in a position to facilitate this phenomenon. Internet-based lending platforms will be especially useful for tapping disparate tertiary markets at once.

Flippers will always be able to use a local hard money lender, but lending options have proliferated in the last decade. National, sophisticated online lenders are ready to lend in smaller markets and don’t need a physical presence to start lending in a particular city where the fix-and-flip market starts booming.

A wide selection of financing options should only energize the flipping market as it shifts away from a distressed, cash-only marketplace to one that can capitalize on at-market houses purchased with financing that facilitates faster portfolio growth.