Funding the Fix-and-Flip Market

The fix-and-flip market boomed a few years ago as the housing market recovered, and is still a viable and profitable business today. The number from RealtyTrac, a real estate analytics, and data organization, paint a clear picture of a healthy industry. The average house flipper saw a return of about 20% in 2011. In 2015, the average return had grown to 35%, and that trend hasn’t reversed. In some parts of the United States, over 10% of all single-family home sales are fix-and-flips; a big chunk of the market.

Large real estate players such as Goldman Sachs, Zillow, and Redfin have seen the potential in the fix-and-flip market and have begun to lend to fix-and-flip developers. Investors and lenders already invested in the market have indicated this is a sign that the market is reaching a greater level of stability and acceptance. During a recent panel at the Single Family Rental Investment Forum in Miami, Sean Tierney, executive vice president of A10 Capital, said, “Goldman coming in is a good thing. It shows that [fix-and-flip financing] is no longer just a trade. It shows that it’s not going away.” There’s also parts of the market that Goldman is unwilling to enter, such as buying occupied properties, due to the risk of potential headlines that make it seem like a big company is buying out lived-in properties.

This leaves plenty of room for outside players to enter the market, and will allow individual or crowdfunding investors to maintain their foothold in the fix-and-flip market.

Fix-and-Flip Trends

House flipping is proving to be a profitable business for flippers, but they’re not the only people profiting from this trade. Most flippers must rely on loans to afford renovations for their project, and investing in those loans can grant returns of 10% or more.

Fix-and-flip television shows make the process looks easy, but in reality, flipping can cost a surprising amount of money. In addition to down payments on the home and renovation costs, flippers have all the costs that come with owning a home until they can sell it – including property taxes, insurance, and HOA fees. Even when the house is sold, the flipper must then pay recording, title search, and escrow fees. As a result, fix-and-flip loans are essential to the market, and those come in different forms. Bank loans are obviously an option, but there’s no room for investment there. There are hard money and private money loans, which requires either footwork or advertisement on the part of the investor. There are also real estate crowdfunding options, which offer the biggest opportunities for real estate investment.

Real Estate Crowdfunding

House flippers apply to a crowdfunding platform in order to list their project on the platform, and the platform screens those applications to ensure that they are eligible for funding and meet other criteria determined by the platform. If they fit the requirements and seem to be a good investment for a crowdfunding platform’s investors, it is listed and offered to potential investors. Crowdfunding websites allow investors to view a description of the flipper’s background and experience before making a decision on a specific project. There is also a summary of the project details, such as photos of the property, its size and location, and planned renovations.

Once an investor has found a real estate investment opportunity that fits their investment criteria, they can purchase a small share in the real estate fund or trust. This investment model is low-risk because it often involves small amounts of money and because it offers legal insulation. A crowdfunding investor is in no way tied to the properties that the real estate fund invests in.

An important element to consider when comparing crowdfunding platforms is vetting. There are quite a few real estate crowdfunding sites, and more appear every day, so it can be hard to tell the difference between legitimate good actors and scammers or predatory sites. An investor has to be savvy. Blindly following trends isn’t enough to succeed; investors have to do the research and ensure that they are protected and ensured a safe return on their investment.

As the flipping market grows, the demand for financing options outside of the rigid requirements of a bank has grown with it. 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.

Lending for the Modern era

The proliferation of online lending platforms offers flippers access to financing that is available regardless of the flipper’s or building’s physical location and can connect interested investors with projects all across the nation. This is excellent news for the modern real estate investor, who has gained additional real estate investment options at a lower cost. Investors can also relax and know that a good crowdfunding site has already done preliminary vetting on any flipper that has applied to the site, which can save the investor valuable time.

Flippers are eager for diverse funding options. More than one-third of house flippers used financing options on their 2016 and 2017 projects. In the second quarter of last year, that percentage grew even higher, demonstrating that a wider variety of flippers are getting involved in the market than before. Ten years ago, a hard money loan would come with an interest rate of 15% or more, and financing options would be restricted to local, brick-and-mortar lenders. Modern investors can now shop and find the perfect project online. It’s a compelling path for flippers, as well, since crowdfunding platforms tend to have faster application response times than traditional loans.

The future of real estate investment is looking good, and the fix-and-flip market is proving to be a stable market. Real estate crowdfunding specifically presents new opportunities for flippers and investors alike and represents the cutting edge of real estate financing. Investors would be wise to investigate and weigh the benefits of crowdfunding in comparison with traditional real estate investment opportunities.