26 Sep Fix-and-Flip
The State of Fix-and-Flip
According the National Association of Realtors, 2016, 2017, and 2018 represent the lowest inventory levels of existing homes since 2009. In many markets, that tight inventory has resulted in competition amongst buyers, driving up prices and strengthening the terms sellers can command, conditions which should be a boom for home-flippers. However, other data suggests that low supply can generate some head winds for fix-and-flip buyers. Being prepared for the current and future state of the fix-and-flip business is paramount to achieving success in the space. The realities of tight inventories, low unemployment, and a generally strong economy present challenges and opportunities to those seeking the financing necessary to purchase, rehabilitate, and “flip” single family homes.
Overall Economic Conditions
The August 2018 unemployment rate of 3.9% points to a strong US economy. Generally, one thinks of strong economic growth as being supportive of real estate investors/developers engaged in the fix-and-flip business, but a strong economy can also present a number of headwinds. For instance, materials and construction costs often increase with improved economic activity. Additionally, financing costs and the costs of compliance with debt covenants imposed by traditional lenders often rise. While real estate investors/developers are often able to command high exit prices, competition for the initial acquisition can result in a smaller margin of error with respect to rehabilitation costs, the “fix” of the fix-and-flip.
Savvy investors/developers should be aware of the cause and effect of economic news throughout their project lifecycles. While a rising tide can lift all boats, it can also create choppier surf for those entering the market.
How to Capture Opportunity While Mitigating Risk
According to Brian Dally, CEO of Groundfloor, a real estate investing platform that touches all aspects of the home-flipping business, two of the most important things to have when looking to execute a fix-and-flip are agilityand runway. Agility allows an investor/developer to respond to changes in circumstances during construction, and runway protects a project’s profitability should there be delays either in the sale process or during renovation.
Both agility and runway can benefit greatly from access to flexible, alternative financing. A traditional lender will often agree to terms before any construction begins, making those terms rigid and difficult to adjust. Maturity dates are often locked in, hurting your ability to endure even the most reasonable of delays. Alternative financing, often available in the private lending market, can anticipate and respond to these circumstances while allowing the borrower to focus on the underlying project.
The Benefits of Private Lending
As discussed above, a private lender can quickly respond to changes in circumstances that a traditional lender could never address. Should you need additional funding, some private lenders will even offer financing via a second mortgage to help bring a property rehab to completion. Blanket mortgages, mortgages issued across a portfolio of properties, are also a tool of private lenders that can help provide the capital needed by investors/developers.
In addition to flexibility on financing arrangements, private lenders will often impose much less restrictive covenants that require less compliance costs over the life of the loan. This is a cost of financing that is often overlooked when borrowers focus solely on term and interest rate.
If you are a real estate investor/developer engaged in the fix-and-flip business, Michael Ciaburri or Worth Avenue Capital, LLC would love to speak to you about your project. Whether Worth Avenue Capital, LLC, a direct private lender, is able to provide you financing or advice on navigating other financing arrangement, we are eager to help you succeed in your fix-and-flip endeavor. Please, do not hesitate to contact us at worthavenuecapital@gmail.comor 203-605-4082. Our experts can understand your situation and work to provide a financing solution that can keep your business operating and growing