Hard money
comes easy as Wall Street funds home flippers for Arizona Home Loans
Real
estate buyers seeking Arizona Home Loans
to renovate and flip U.S. houses are getting help from some of the world’s
biggest investment firms.
Colony
Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the
companies that have started making bridge loans to investors who buy homes to
sell them quickly for a profit. Borrowing costs -- traditionally the highest in
residential lending -- are tumbling as the firms compete for customers.
The
foray represents a deepening bet on the housing market by Wall Street-backed
companies, many of which have built rental-home empires during the past three
years and started specialty-lending businesses to finance smaller investors.
Big firms with deep pockets and access to cheap capital may have an edge over
local private lenders that have dominated flipper financing.
“It’s one of the few highly fragmented
businesses left,” said Beth O’Brien, chief executive officer of Colony’s
lending business, which started offering the loans last May. “If someone can do
it nationally at scale, it’s cheaper and better for the borrower.”
Bridge
loans, also known as hard-money or asset-based loans, give flippers cash for
home purchases and construction with about a year to repay, and are backed by
the real estate. They represent an opportunity of about $30 billion in
origination annually, according to LendingHome, an online mortgage marketplace
that makes short-term loans and sells them to investment firms such as Colony.
Blackstone,
the world’s biggest alternative-asset manager, is seeking to make $1 billion of
the loans a year, according to Nick Gould, executive chairman of the firm’s B2R
Finance unit. B2R, started in 2013 to lend to landlords, earlier this year
acquired Dwell Finance, which provides “fix and flip” funding.
Record
Profits
Arizona Home flippers are benefiting from rising prices, limited new construction
and a shortage of inventory on the market. While quick resales have decreased
from the start of the housing market’s rebound, when investors snapped up
discounted distressed homes, profits are getting bigger.
The
average gross profit for completed flips in the first quarter was $72,450, up
from $61,684 a year earlier and the highest in records dating to 2011, according
to a report Thursday from RealtyTrac, a real estate data firm. Markets with the
highest average gross return on investment included Baltimore, central Florida
and Detroit.
Fix-and-flip
investors have generally gotten funding from local private lenders as banks
have shown reluctance to extend credit for speculative real estate deals.
Borrowers are forced to pay high costs in exchange for the quick cash.
Since
big investment firms have entered the industry, rates have already come down
significantly and fees charged to borrowers, known as points, have decreased as
well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based
real estate firm that has been lending to house flippers for about 14 years.
“Rates
historically were much higher, typically 15 percent with three to five points,”
Lewis said. “In the last few months we’ve seen deals being done at 10 percent
and two points.”
The
new lenders are focused on more experienced investors, many of whom have have
established companies, rather than the amateurs that proliferated during the
housing boom a decade ago. Today’s flippers are more sophisticated after the
crash weeded out most of the weaker investors, Lewis said.
“These
are ideal clients, with the potential to be repeat borrowers across a number of
product lines,” said Randy Reiff, chief executive officer of Cerberus’s
FirstKey Lending.
Resource
Intensive
FirstKey
started offering fix-and-flip loans about six months ago and is just beginning
to expand the business. Interest rates generally range from 9 percent to 12
percent for 12-month terms. Borrowers often sell their homes and repay loans
earlier, said Reiff, which means it takes a lot of effort to rapidly expand the
business.
“It’s
resource intensive, and it’s important to have an adequate infrastructure,” he
said. “If the regional guys do $50 million of product a year, they could be a
major player in their markets. For the larger institutions, that barely moves
the needle.”
The
hard-money market is getting crowded, which may lead companies to loosen their
standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired
by credit investor Garrison Investment Group about six months ago. His business
has more than 300 approved borrowers with credit lines.
“Everybody
just jumped in,” said Filler. “The risk is people start to relax underwriting
guidelines to chase loans. As this becomes more competitive, there will be more
pressure to do that.”
Added
Service
A
regional company such as Dominion competes on service when it can’t offer rates
as low as Colony or Dwell Finance, Lewis said.
“We’re
closer to the ground so we can lend higher loan-to-value for Arizona Home Loans and lend it faster,”
he said. “If someone calls on Monday, they can be preapproved and funded on
Friday. Institutional guys can’t do that.”
Borrowers
such as Alex Sifakis, president of Jacksonville, Florida-based JWB Real Estate
Capital, are willing to pay more for greater leverage. His firm buys about 40
homes a month and sells half, keeping the rest for rentals.
Dominion
gives JWB 90 percent of the home’s purchase price and 100 percent of rehab
costs, he said. That compares with 85 percent of both purchases and renovation
it gets from lines of credit with institutional lenders, including Genesis
Capital, which comes at 9 percent interest rates and two points. Los
Angeles-based Oaktree Capital Group LLC invested $100 million in Genesis in
January 2014.
“It’s
a great thing to have more and cheaper money in the space,” Sifakis said. “It
will cause some of these guys charging 14 percent and 4 points to lose a lot of
business.”
‘National
Platform’
Blackstone’s
B2R is focusing on more established borrowers like Sifakis, to whom they extend
loans that look more like lines of credit that average $1 million and go to as
high as $100 million, with assets cross-collateralized. Rates are as low as 8
percent and one point. The firm also built a technology platform to make the
application process faster.
“This is a sizeable and timely opportunity to
institutionalize and consolidate an asset class that’s always been a localized
business,” B2R’s Gould said at a real estate conference in Miami last month.
“There hasn’t been a national platform that has the capacity
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