HOUSINGNEWS REPORT
PRIVATE LENDING GOES PUBLIC
“We visit each property and meet each borrower as part of our underwriting process,” he continued. We run comps to determine the exit price and velocity of trades in each neighborhood, and we analyze borrower history and financials. If any piece of the deal doesn’t work, we decline the loan. The most common reasons for declining a loan application are a lack of borrower capital, zoning or entitlement issues, and inexperience of the borrower in relation to the complexity of the project.” “We decline early stage loan applications all the time,” said Asset Based Lending’s Krattenstein. “Without a doubt, the most common reason is that the financials just don’t make sense and we’re trying to save our
investor from a bad deal. We have a minimum profitability rule in our underwriting guidelines that stipulates a borrower must make a certain amount of (anticipated) profit on the deal for us to finance it.” Krattenstein explained that “inexperienced investors often forget to account for various fees and holding costs involved with real estate transactions, so our loan officers and underwriters help guide borrowers through the deal economics to make sure it makes sense for the risk involved. Believe it or not, most of our declined applications end up thanking us for shining some light on the situation and return with a more profitable investment.”
While the returns for flips can be significant, flipping profits – just like stock and bond profits – are not a sure thing, there are no guarantees. Much can go wrong and there is substantial risk. Real estate investors may pay too much for a property. Rehab expenses can be greater than expected. The market may cool and with it home values. The list goes on. “We underwrite the borrower as well as the property or asset,” says Montagne with Walnut Street Finance. He adds that “the borrower is an important part of the asset. If the property is a great buy in a great location but the borrower can’t execute the renovation, the project will not be a success. Personal responsibility is an important indicator of this ability to execute. If a borrower has recent bankruptcies or very poor credit, that speaks to his or her responsibility and ability to deal with crises as they arise.
“We understand first as flippers and now as lenders that flipping can be risky, so we vet our deals carefully.”
BOBBY MONTAGNE FOUNDER AND CEO WALNUT STREET FINANCE
U.S. HOME FLIPS AT 11-YEAR HIGH IN 2017
SINGLE FAMILY HOME AND CONDOS FLIPPED
HOME FLIPPING RATE (PCT OF TOTAL SALES)
400,000
9.0%
8.0%
350,000
7.0%
300,000
6.0%
250,000
5.0%
4.0%
200,000
3.0%
150,000
2.0%
100,000
1.0%
50,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
0.0%
6
APRIL 2018 | ATTOM DATA SOLUTIONS
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