In the past 12 months, short-term US Treasury rates have risen nearly three full percentage points. It has taken some time, but now short-term fix & flip lenders are finally responding and looking to pass through those increased costs to the borrowers. But not all fix & flip lenders are created equal, and some are better positioned to keep rates lower for their borrowers than others. Understanding these differences can help to save you or your clients a lot of money.
It all depends on where your fix & flip originator’s funding comes from. Lenders generally fit into four categories, and many lenders use a combination of these sources.
Wall Street – hedge funds and insurance companies have had a healthy appetite for the high yields offered by fix and flip loans. Companies such as Toorak, Roc Capital, PeerStreet, AlphaFlow, and Constructive Capital either table fund loans brought to them by originators or purchase the loans from originators within a few weeks after the loan closes. As a borrower, your client wouldn’t even know that one of these companies is behind the funding of your loan, unless they ask. These companies rely on the bond market, and that market has become extremely volatile in the past 120 days. Lenders that rely on Wall Street for their funding are struggling right now, and they have no choice but to pass along the full brunt of higher costs to their customers.
Bank Capital – Some fix & flip lenders borrow a portion of their capital from banks. Bank rates tend to follow the Federal Reserve. The cost of bank capital is up, but not as much as Wall Street. Also, banks borrow most of their money from the American public through savings accounts, CDs, and money market accounts — and those rates haven’t risen much. Lenders with bank capital haven’t been hurt as badly as lenders who rely on Wall Street. These lenders may raise their rates some, but not as much as the Wall Street folks.
Private Investors – Many originators borrow from private investors at one rate and lend it out at a higher rate. These private investors tend to be a little more ‘sticky’ with the rates they’re willing to accept. The originators may be getting some pressure from their private investors to raise rates, but if you see rate increases from this crowd, it may just be them being opportunistic. Push back a little. They may keep their rates the same.
High Net Worth Individuals – These lenders are lending their own money and tend to be smaller (annual loan volume <$10MM). They set their own interest rates. Again, they may be opportunistically trying to raise the rates, but they set the terms. Building a relationship with these folks can help you keep your rates the same in a rising rate environment. Caveat: they tend to be smaller lenders, so they sometimes run out of capital. Develop these relationships but keep other options available in case they’re out of money or at the beach.
As I said before, many lenders use a combination of these sources. They may be a high-net-worth individual with some bank capital. They may have a pool of private investors, but they sell all of their loans to Wall Street. Call your lender and ask them how they’re funded. It’s not rude – it’s due diligence.
The real estate market is softening, and the capital markets are in flux. It’s time to touch base with your lender and see if their loan program has changed, too.
Dominion Financial Services is a national private lender, currently offering 7.99% fix and flip interest rates, no appraisals, and a 48-hour close. Visit their website to get pre-approved for a Dominion Financial Services Investor Line of Credit.
About Jack BeVier
Jack BeVier joined Dominion Financial Services and the affiliated Dominion Group in 2007 and has worked in nearly every aspect of single-family investment real estate including acquisitions, construction, property management, marketing, sales, business development, and finance. In his role as Partner, Jack has helped build Dominion Financial Services into a nationally recognized private lender for experienced real estate investors. Jack is a graduate of the University of Pennsylvania’s Wharton School and is the co-founder of Baltimore’s non-profit trade organization for real estate investors, the Small Developer’s Collective.