Commercial Magazine

Opening the Door

A new lending model offers opportunities for fix-and-flip investors

By Jason Hutton

For years, we’ve heard about the ongoing U.S. housing inventory crisis. Since 2001, underbuilding has led to what is now a historic deficit of between 5.5 million and 6.8 million housing units, according to a National Association of Realtors (NAR) study. The report notes that the state of America’s housing stock is dire, with a chronic shortage of affordable and available homes needed for the nation’s population. The housing shortage is only being intensified by the recent rise in interest rates.

Up until now, investors have had to hunt for quality lenders and analyze a variety of options for hard money loans. Those days are over as technology is unleashing a better way.
While the shortage of housing units has been discussed for years, the COVID-19 pandemic has exacerbated an already challenging situation. Early in the health crisis, available homes sold quickly, with the majority on the market for less than a month. This fast and furious pace has continued through the first half of 2022, even as the median home price has exceeded $400,000 for the first time.
Rising rates have somewhat tempered home-price growth and the pace of sales, but the supply-and-demand gap is still significant. NAR chief economist Lawence Yun noted this past June that despite rising interest rates, appropriately priced homes are selling quickly, and available inventory levels will need to almost double before price appreciation cools and buyers are given more options.
First-time buyers, in particular, continue to pull back from buying, as evidenced by an ongoing decline in their share of existing-home sales. Millennials currently account for 43% of all homebuyers, but they face the most challenging market in recent history.

Where are builders?

Supply chain challenges, skyrocketing prices for construction materials and labor shortages have increasingly plagued homebuilders since the COVID-19 crisis began in the spring of 2020. Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said this past June that the shortages include a lack of lumber, appliances, cabinetry, electrical transformer equipment and buildable land.

Now is not the time for borrowers or brokers to push the envelope on higher loan leverage, more aggressive pricing or unusual exceptions. Simplicity, clarity and experience will carry the day.

NAHB reported that residential construction material costs were up 19% year over year at that time. The cost increases encompassed a variety of building inputs, except for lumber, which had experienced declines due to a slowdown in building permits.
Residential housing starts are suffering as a result, dropping to the lowest levels in more than a year, and builder confidence reached a low point for this year in June. Meanwhile, any buyer fortunate enough to have a new build in progress can expect a wait time of eight months or longer before moving in — that is, if they don’t cancel the project mid-process due to mortgage rates not being locked.

Old is new again

Amid this perfect storm, a solution continues to sit relatively dormant in neighborhoods across the country: distressed housing. According to a 2021 White House fact sheet, approximately 40% of U.S. housing stock is at least 50 years old, and a more recent report from LendingTree found that roughly 16 million homes are sitting vacant.
Repurposing existing homes is the best answer to the nation’s inventory crisis. Existing homes can generally be acquired, renovated and sold in less time than it takes to build a new home. To help spur this process, President Joe Biden announced a proposal last year for a new tax policy called the Neighborhood Homes Tax Credit (NHTC), which is aimed at further incentivizing the redevelopment of distressed communities.
The proposal is part of the Build Back Better Act, which has passed the House of Representatives but is meeting resistance in the Senate. If approved, NHTC would finance the gap between the construction and/or rehabilitation costs of homes in distressed communities and the sales price of these owner-occupied homes.
Investors who acquire and renovate older homes could claim the credit on their federal tax returns, in essence making the reportable income nontaxable. The home has to be located in a community that meets certain criteria, the homebuyer has to fit the income profile of the neighborhood, and the sales price cannot exceed four times the area’s median family income.
Wise investors are capitalizing on the opportunity to invest in these communities and create a pipeline of affordable housing. Local investors are in a better position to refurbish distressed properties compared to owner occupants. They not only bring the necessary financial resources but also offer expertise and capabilities beyond those of even the most determined do-it-yourselfer.
Investors can assess a property’s structural features and potential damage, from foundation to roof, and determine the best plan to add value. They often bring strong resources and relationships to the project — from contractors to materials — along with negotiated discounts. Investors also are used to unexpected and unfortunate circumstances in a home flip, such as building code nuances and stolen copper. All around, investors deliver a more efficient rehab project.

Different loan types

The process of funding a real estate investment through a residential transition loan (RTL) — which often falls into the hard money category — has not historically been an easy one. Investors have had to search for lenders and devote considerable time to comparing options, finding a quality partner and getting approved.
Today, however, the steps are quite similar to that of other commercial mortgages. The industry has grown, standardized and even institutionalized many processes over the past few years, including rated securitizations for single-family rental (SFR) loans.
The process for obtaining an SFR loan, however, can be fairly unique depending on the property, the borrower and the business strategy. Add in the current financial climate, interest rate increases and the general uncertainty facing many lenders in the marketplace, and the process can take a few unexpected twists and turns.

A new model

As everyone knows, timing is everything in today’s market and deals don’t wait. As a result, a new model has been created to accelerate and expand credit access. Tech-enabled solutions put more power into the hands of mortgage brokers and borrowers, allowing them to access a marketplace that brings lending options together in one convenient and intuitive platform. This offers the most reliable, flexible and accommodating debt options within a local market.
Options include national, regional and local institutional providers of RTLs and landlord loans, the latter of which are commonly known as debt-service-coverage ratio (DSCR) loans. The underwriting criteria on a DSCR loan relies on rental payments and other income generated by a property that cover the required debt service on the loan, including principal, interest, taxes, insurance and other costs.
With these new marketplace platforms, each transaction is managed by a central point of contact through an interface that seamlessly connects borrowers, brokers, lenders and other key stakeholders. Using a more efficient approach enables more transparency, more access and better value for real estate investors big or small. Everyone wins when debt for these transactions can be arranged and funded more conveniently and cost-effectively.
Additionally, many lenders now offer mortgage products based on hybrid and/or web-based valuation methods. These leverage large amounts of data and analytics, including automated valuation models, to accelerate the underwriting process. This technique has significantly increased the speed to market while reducing the total time to originate and close a loan.

Opportunity awaits

The challenges for lenders in 2022 are not insignificant. As the Federal Reserve raises short-term rates, uncertainty remains about the general appetite for risk, the locations where lenders are willing to do business and loan amounts. Lenders seem to be holding fast and continuing to fund deals, albeit with adjusted pricing, leverage levels, investor experience or required asset reserves.
Now is not the time for borrowers or brokers to push the envelope on higher loan leverage, more aggressive pricing or unusual exceptions. Simplicity, clarity and experience will carry the day. Loans that are perceived to be “down the middle of the fairway” and within predefined parameters of a lender’s credit box will encounter the least friction and have the greatest chance of funding as expected — and on time.
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Real estate continues to emerge as a hedge against inflation. The opportunity to fix and flip, or fix and hold, are viable investor strategies for the foreseeable future. According to a recent Attom Data Solutions report, flipping activity rose in 95% of local markets from fourth-quarter 2021 to first-quarter 2022 — representing nearly one in 10 homes sold.
Providing investors with a more user-friendly and convenient way to access the widest variety of credible and flexible funding options will further fuel the market. Ultimately, this will deliver opportunity for everyone — including more options for brokers and investors, a fresh start for sellers and affordable housing for buyers. ●


  • Jason Hutton

    Jason Hutton is senior vice president and chief operating officer of Sherman Bridge Lending, which provides fast and reliable capital for real estate investors. Through its proprietary marketplace, The Bridge, the company offers a variety of vetted and flexible debt options to help borrowers purchase and rehab investment properties to either sell or rent. Financing provided through The Bridge makes it possible for investors to take on more projects at the same time, make extensive improvements and scale their real estate investment business faster. 

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