• James Rodriguez

Wall Street's appetite for fix-and-flip loan deals has plunged


Until just a few months ago, investors were clamoring to buy stakes in huge pools of loans made to home flippers. The fix-and-flip business was booming, thanks to record-low interest rates and a rapidly appreciating housing market. For home flippers, money to fund rehab projects was cheap and abundant. Not anymore, thanks to the Federal Reserve's efforts to cool inflation by raising interest rates. Private lenders are now forced to charge flippers higher rates for short-term loans, eating into the profit a flipper can make on a home. Lenders are also tightening their standards, favoring those with experience and the ability to put more of their own money down. In short, it's a tough time to be a flipper 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, accounting for almost 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 face more competition for deals, higher costs for materials and labor, and shrinking gross profit margins, according to Attom. Lots of deals are still getting done, however. For flippers who have done plenty of rehabs or who have been patiently waiting for the housing market to cool, opportunities to complete even more transactions could be on the horizon. Wall Street dictates how easy it is for home flippers to borrow money The biggest players in fix-and-flip lending — companies like Toorak Capital Partners, Churchill Real Estate, and MFA Financial — buy up loans from smaller lenders, package them into portfolios worth hundreds of millions of dollars, and sell the income streams as bonds in a process known as securitization. Now those companies are finding that Wall Street's appetite for underwriting those deals has dried up. Fix-and-flip loans can range from roughly $50,000 to more than $1 million for bigger projects. The Street's bond investors are reluctant to buy up these loans at the moment, since many were made months ago when rates were significantly lower. That's a big problem for the $75 billion-a-year home-flipping industry, which relies heavily on securitizations to keep money flowing from big investors down to private lenders, and from the lenders down to individual home flippers. "This is a much bigger industry than a lot of people realize," said Ray Sturm, the cofounder and CEO of AlphaFlow, a company that buys up fix-and-flip loans and funnels them to Wall Street through securitizations. "If you're a homeowner and you want your neighborhoods to keep getting built, these are the people that do it. This is where they go to finance their projects."


Headshot of Ray Sturm, CEO of AlphaFlow Ray Sturm is the cofounder and CEO of AlphaFlow, a company that buys up fix-and-flip loans and funnels them to Wall Street through securitizations. Courtesy of AlphaFlow Debt is still available to flippers, but some private lenders have slowed their lending pace or halted because of a lack of capital. Most are seeking other streams of capital and tightening their lending standards, favoring flippers with track records and more of their own cash to put into projects. For some flippers, it's business as usual Jeff Onofrio, an executive at Cherry Creek Mortgage in New Jersey who flips homes on the side, said he's able to keep four or five fix-and-flip deals going at once because of financing he gets from BRRRR Loans, a private lender whose name refers to the popular real-estate investment strategy of buy, rehab, rent, refinance, and repeat. "There's always going to be somebody willing to lend money," Onofrio said. "They'll just be a little tighter on it. They'll make it a little bit more expensive, and they may put a couple of extra guidelines on it." Recently, Onofrio was asked to provide a personal financial statement when applying for a loan, which he said he'd never been required to do previously. He added that first-time flippers would face significant challenges in this environment. "Someone without experience coming in and trying to do that, 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 been doing it for a while." Inexperienced flippers still have options, said Alex Offutt, a managing director at the private lender Constructive Capital. "If a first-time flipper wants to come in, they're going to have to put down more money, and they're going to have to take a slightly higher rate," Offutt said. "Now, are there still opportunities? You betcha. No question." Higher interest rates put the brakes on 'endless' liquidity The unprecedented run-up in interest rates since April has left private fix-and-flip lenders with loans on their balance sheets that are difficult to unload through securitizations, since bond buyers now demand higher returns to match higher interest rates. Investors think the flipping industry will continue to turn a profit — there's just a pricing mismatch on rates. Six months ago, an average home flipper could get a one-year bridge loan with a rate of roughly 8.5%. That's now up to about 10.5%, Eric Abramovich, a cofounder and chief credit officer of the fix-and-flip lender Roc360, told Insider. These days, Abramovich said, the end investors who buy up these loans want to make about a 9% return, and the lender also needs to make a few percentage points on the deal. "That means borrowers need to be paying 11%-plus to make everyone happy," Abramovich said. "That's a tough pill to swallow for borrowers." Sturm said a robust market for fix-and-flip loan securitizations over the past two years made liquidity seem "endless." Now, as the big players try — and fail — to market these loans as securitizations, capital pipelines are getting cut off. That might leave flippers who aren't used to getting turned down for loans feeling confused, Sturm said. "When securitizations basically seize up that quickly, even some of those good projects have been challenging to get funded," Sturm said. "It doesn't mean they're not good projects. It just means the funding wasn't quite there." There's some good news for flippers, too As the real-estate market has boomed over the past two years, one of the biggest challenges for home flippers has been finding inventory. They were competing with many new flippers who had been lured in by cheap debt and rising home prices. Now that the housing market is cooling and these loans are harder to come by, experienced flippers will have more of an advantage. Lenders with reliable sources of capital outside the securitization market will still keep making loans, Offutt said. Constructive Capital, for instance, draws funding from its relationship with a large life-insurance company that needs to invest billions of dollars each month, he said. Joel Kraut, the cofounder and managing director of BRRRR Loans, said he welcomes the heightened competition and opportunities that come with higher rates. "Now you have to really make sure you're investing and not just spending money," Kraut said. "Now more than ever, that's going to show."


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