The following is an excerpt from a white paper published by ATTOM Data Solutions. The full nine-page white paper with exclusive data and charts on the private lending marketplace is available for free download here.
For many people the investment real estate market is off-limits. They can’t buy and they can’t invest because they lack access to traditional lenders, the banks with big vaults and lots of ATMs. For investors, especially flippers, the situation is worse simply because they represent more lender risk.
This is a problem because for many Americans the most direct route to personal wealth has been real estate. For most property owners the numbers have been pretty good but for a few the returns are spectacular: home flippers had an average 49.8 percent return on investment (ROI) in 2017 according to ATTOM Data Solutions. Not quite as good as 2016 when the flipping ROI hit a record 51.9 percent, but still the second-highest average home flipping ROI since 2000 — the furthest back data is available.
But the situation is changing as a growing number of lenders catering to the investment property world emerges. ATTOM reports that 207,088 U.S. single family homes and condos were flipped in 2017 and of this number 34.8 percent were financed — a total of 72,000 units. The dollar volume for financed flips was $16.1 billion, up 27 percent from 2016 to a 10-year high.
Technology-Fueled Private Lender Growth
Where traditional lenders fear to tread others see demand. Private lenders — individuals and organizations which make investment real estate loans to borrowers who otherwise cannot get financing — are looking for a bigger share of the marketplace. And they seem to be getting it.
“We aren’t surprised that the dollar volume and share of financed flips are hitting new highs,” said Matt Humphrey, co-founder and CEO of LendingHome, which saw a nearly 70 percent increase in its dollar volume of loans to home flippers who completed a flip in 2017 and a 50 percent increase in the number of loan originations, according to an ATTOM analysis of select fix-and-flip lenders. “Online lenders like us exist because banks and large lenders don’t play in this space, and they aren’t using technology to be efficient, nimble and fast. Now that investors have digital-native lenders catering to them, financing becomes an attractive alternative to cash. We predict this trend will continue because 2018 is already off to an incredible start for us.”
A key competitive advantage for private lenders is the ability to move quickly with a financing request, to fund in days instead of weeks or even months. The use of hyper-local, hyper-now, property-specific data is allowing private lenders to make pinpoint financing decisions quickly and with great confidence.
“There is a common misconception that private lenders like us only exist to service borrowers that have bad credit or are otherwise ‘unbankable,’” said Eric Krattenstein, chief marketing officer and head of sales with Asset Based Lending, LLC. “In fact, the opposite is true. Most of our borrowers are perfectly bankable, but very few programs exist for investors. The few bank programs that do exist take 8 to 10 weeks to close, where we can do it in 8 to 10 days or less! Speed is the name of the game in this business.”
“Typical bank products do not service investors for many reasons, both in product eligibility and speed of execution,” said Stephen Pollack, CEO with Anchor Loans, LP, which saw a 24 percent increase in loan origination volume to home flippers who completed a flip in 2017, according to the ATTOM analysis. “Private lenders fill a much-needed gap where banks are unable to service the industry.”
Institutional Capital Chasing Private Lending Returns
The ATTOM analysis shows another national fix-and-flip lender, Roc, saw a more than 100 percent jump in loan originations to home flippers who completed a flip in 2017, an increase that Roc co-founder and COO Maksim Stavinsky attributes in part to strong demand from institutional investors looking for good returns in a low interest rate environment.
“Institutional demand in this space has grown substantially over the last several years. Fix-and-flip has become an asset class of its own that is well-financed by banks and highly sought by institutional buyers,” said Stavinsky, quoted in the ATTOM 2017 home flipping report.