InvestingMarkets & Economy

How are fix-and-flippers typically financing their buys?

Borrowing costs tumbling, home prices rising and how flippers are managing it all
  • Thirty-two percent of homes flipped in Q2 2016 were financed, the highest level since Q3 2008.
  • Real estate crowdfunding and hard money loans are two financing options for fix-and-flippers.

Some believe house flipping is a fad.

It’s anything but that.

Not only is flipping homes for a profit a growing industry, but it is exceedingly popular on cable television, where more than half dozen prime-time flipping shows feature quick-turn real estate investors, including “Flipping Boston,” “Flipping Vegas,” “Flipping Out,” “Flip or Flop,” “Fixer Upper” and “Zombie House Flipping.”

Americans — it seems — can’t get enough of flipping shows.

And the growing number of flippers bears this out.

In 2015, investors flipped nearly 180,000 single-family homes and condos nationwide, accounting for 5.5 percent of all sales, according to Attom Data Solutions, which defines a flip as a house resold within six months of purchase. More than 51,000 single-family homes and condos were flipped Q2 2016, the most flips in six years, reports Attom.

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And more flippers are using financing to fund their flips — 32 percent of homes flipped in Q2 2016 were financed, the highest level since Q3 2008.

Nearly 40,000 investors — both individuals and institutions — flipped homes in Q2 2016, a nine-year high.

Markets with the highest flipping rate in the second quarter of 2016 were:

  • Memphis (11.1 percent)
  • Visalia-Porterville, California (10.1 percent)
  • Tampa, Florida (10.0 percent)
  • York-Hanover, Pennsylvania (9.7 percent)
  • Mobile, Alabama (9.6 percent)

Not only is the flipping industry large and growing, but new players are moving into the space.

Serial flipper and real estate investor Alex Sifakis, president of JWB Real Estate Capital in Jacksonville, Florida, said over the last few years his company has increasingly borrowed money from crowdfunding sources. When he needs a few million dollars to purchase the 50 to 60 properties his company buys every month, he simply turns to an online crowdfunding sites.

“Anytime we need money, it’s only 12 hours away,” said Sifakis, whose company manages more than 1,300 rental properties for clients, of which 400 are owned by JWB. “It’s pretty amazing.”

Sifakis estimates his firm will need $50 million this year to fund his ever-expanding real estate empire. His firm sells half of the purchases to other investors, keeping the rest for his own rental portfolio. He also manages rentals for passive real estate investors.

“We’ve raised over $13 million from RealtyShares alone in just two years,” he said.

Sifakis said that in addition to hard money lenders, his firm has increasingly relied on online real estate crowdfunding sites like Dominion, Genesis Capital, RealtyShares and other short-term money-lending firms.

In addition to these and other crowdfunding sites, some of the nation’s largest Wall Street investment banks and private equity firms — including Cerberus Capital and Colony Capital — have started making short-term bridge loans to investors who buy homes to quickly flip them for a profit.

“These firms are big players in the residential real estate market,” he said.

But Sifakis said it’s getting harder to find good deals and it costs more to find them.

“It’s getting harder to find houses,” said Sifakis. “Two years ago, we would find 80 percent of our acquisitions on the MLS. Now the cost of acquisition has increased because we have to spend more money on marketing and locating properties to purchase. The margins are getting compressed.”

He also said borrowing costs — traditionally the highest in residential lending — are tumbling as more online lending platforms compete for customers.

Real estate crowdfunding platforms

Flippers are increasingly looking for new and creative ways to finance their flips, and crowdfunding is a popular source of funding, according to Nav Athwal, chief executive officer and founder of RealtyShares, an online crowdfunding fix-n-flip short-term lender.

“We’re a national platform, but most of our short-term loans are in six or seven states, including California, Texas, Illinois, New Jersey and Florida,” said Athwal, a real estate attorney and electrical engineer by training.

“Flippers are our core business. We’re geared towards flippers. Since hard money lenders are too expensive, we are an attractive alternative for real estate flippers.”

Hard money lenders

Hard money loans, also known as bridge loans or asset-based loans, give flippers cash for home purchases and construction with about a year to repay.

Hard money loans are for a short period of time — usually one year or less — with interest rates much higher than bank loans. Hard money lenders are a higher risk for flippers because they can expect to pay higher interest rates, ranging from 14 to 16 percent, plus origination fees on top of the high interest rate.

RealtyShares, however, charges interest rates as low as 8 to 12 percent on a short-term renovation loans, with a 2.5-percent origination fee.

“Over the last year, we have seen a lot more capital flow into the fix-n-flip market,” said Athwal, whose platform originates, underwrites and services loans. “Flippers are leveraging our platform to do more projects.

“California has always been a high volume market for us. Cities like Los Angeles, San Diego and the Bay Area are active flipper markets. We’re seeing a lot more deals above $500,000 in California.”

Real estate investors pumped $2.5 billion into crowdfunding platforms like RealtyShares in 2015, according to Massolution, a Los Angeles-based crowdfunding research firm.

That’s more than biotech, alternative energy, tech wearables, online gaming and social media start-ups combined, reports the Los Angeles Times.

But there are perils inherent in hard-money lending, which is often a final option for borrowers who can’t qualify for bank loans. The term “hard-money” lending can be traced to the Great Depression, when private individuals started lending money because many banks had folded.

Luxury home flips soaring

Not only are home flips rising — but they’re going upscale, too.

Million-dollar flips

Flips of homes priced at $1 million or higher are more profitable than entry-level quick-turn properties. The average gross profit for a flip sold between $1 and 2 million is $366,466, generating a 37 percent gross return on investment, according Attom Data Solutions.

And flips sold between $2 and $5 million generated an average gross profit of $835,678, creating 42 percent in gross return on investment (ROI).

Wicked smart money by ‘Flipping Boston’

In Boston, professional flippers Dave Seymour and Peter Souhleris, stars of A&E’s television show “Flipping Boston,” and partners in the real estate brokerage CityLight Homes, are hooked on the flipping game. High prices and low inventory makes these heady days for flippers like Seymour and Souhleris.

“I use everything in my power to use other people’s money,” said Seymour, who with his partner flips 12 to 20 houses a year using hard money lenders and private lenders. “We typically don’t use our own money.”

Read the full story in the Attom Data Solutions Housing News Report.

Octavio Nuiry is the managing editor at Attom Data Solutions.

Email Octavio Nuiry.