My son, Tom, and I just returned for the 5th Annual American Association of Private Lenders Conference in Las Vegas. At the conference, fix and flip loans were all the rage. Everyone was talking about them. Several of the break-out sessions were about fix and flip financing. There were even hedge fund managers and Wall Street investment bankers prowling the conference floor in search of hard money shops (private money mortgage brokers) to sell them more fix and flip loans.
There is a lesson to be learned here: Give the investment community what it is seeking. If you are not already active in fix and flip financing, you need to start focusing your efforts there.
There are a number of reasons why the investment community is so hot-to-trot to make fix and flip loans:
- Debt buyers are desperate for yield. Treasuries, corporate bonds, and even junk bonds offer only very low yields.
- Fix and flip loans are secured by real estate. In start contrast, corporate and junk bonds do not offer this kind of collateral.
- Wall Street has learned that a portfolio of rental homes provides an excellent source of cash flow and potential appreciation. Its is far from the end of the world if an investor has to foreclose on a home.
- Homeownership rates have plummeted to levels not seen since the 1960's, thereby creating a huge demand for rental homes. Once again, if a fix and flip lender forecloses on a newly-renovated rental home, it is far from the end of the world.
- New home construction is far below the levels of the early 2000's, so home buyers are attracted to newly-renovated properties.
The typical fix and flip loan is a first mortgage loan to a renovator to buy and renovate a one-to-four residence and then to quickly sell it for a profit. The typical fix and flip loan is a 12-month, interest-only loan, and it has no prepayment penalty.
Virtually all hard money lenders making fix and flip loans will require that the renovator cover at least 15% of the acquisition price of the unrenovated house. Then most hard money lenders will lend to the renovator 100% of the funds needed to renovate the property.
John Renny plans to buy a $100,000 house and then to spend another $60,000 in renovations. The hard money lender will require that he put down at least $15,000 on the home purchase. The hard money lender will then lend him $85,000 of the acquisition price plus the $60,000 cost of renovation plus the loan points and sometimes even plus a four-month interest reserve.