More Have Lenders Entered This Space Lately
At the moment, the most well-known names on Wall Street have stayed out of this market. However, the number of new lenders in this space has grown. The biggest participants include non-banks and some regional banks.
It is easy to understand the impetus for lenders to tap into the house flipping market: the median 7.9% annual interest rate on a fix and flip loan is more than double that of the 3.09% rate that banks typically impose on a 30-year mortgage. Fix and flip loans also have the added benefit of being relatively short-term, usually lasting months as opposed to years, which is enticing to lenders with interest rates starting to climb once more.
COVID-19 Help Explains Rising Demand for Homes
Because of the COVID-19 pandemic, people in urban areas with a high cost of living have realized they can save money living someplace else while keeping their jobs. Thus, beginning in 2020, people began migrating from densely populated urban areas with high costs of living to smaller towns and cities with a lower cost of living.
Many house flippers have been cashing in on this. However, the problem is that the inventory for existing homes is at its lowest since 1999, largely as a result of new construction never fully reaching the levels reached before the housing bubble burst in 2008. This low inventory has incentivized people to purchase and rehabilitate older properties for sale.
Rising Home Demand Means More Financing Demand
With the smaller inventory of existing homes, prices have risen, meaning house flippers more often need additional financing to purchase those homes. All signs continue to suggest flipping activity will remain high through 2021. Some research points toward flippers selling $75 billion worth of homes in 2021 relative to $56 billion average amount over the preceding three years. Most people are not interested nor able to fix up their own home – they want to move into a nice, finished home. For those operating in this space, this means more business.
Most Fix and Flip Homes Sold for Less Than $300,000 Last Year
According to recent Bloomberg data, two-thirds of fix and flip homes sold for less than $300,000 in 2020, which is about the same sales price as for non-rehabbed existing homes. Fix and flip houses also tended to be smaller, averaging around 1,500 square feet compared to the median size single family home in the U.S. of just over 2,000 square feet. Therefore, fix and flip homes are not particularly pricey and tend to be a bit smaller in size.
Financing Demand Is Expected to Remain High
If unemployment rates remain high and forbearance initiatives for outstanding mortgage balances expire, banks and other lenders may choose to foreclose on an increasing number of properties. Investors in this space may decide that now is the right time to snap up some distressed properties sold through foreclosure at below-market prices.
If you have any questions about this article, reach out to Geraci’s Transactional team here.
About the Author
Caleb Nissley is a Transactional Attorney at Geraci LLP, who specializes in banking and finance transactions, including drafting promissory notes, security agreements, and other loan documents. Caleb works most closely with lenders and brokers who make business purpose loans secured by real property. He also researches legal and compliance issues for clients as it relates to clients’ specific banking and finance needs.