Lenders and vendors flock to fix-and-flip lending

New Western, which works with investors in fix-and-flip properties, has migrated its affiliated lender, Sherman Bridge, into its own marketplace that helps owners to find financing.

The majority of fix-and-flip properties — or their alternative, fix-and-rent — are purchased by what the industry has termed "mom-and-pop" investors.

However, most transactions are all-cash. Approximately 37.4% of second quarter sales used some sort of financing, but that was up from 34% in the first quarter, according to Attom Data Solutions.

"The second-quarter dip in all-cash flips came during a brief period when mortgage rates were declining a bit after spiking during the prior year," Rob Barber, Attom's CEO, said in a press release. "With rates now rising again, there will be more pressure on investors to use cash to finance their activity. The third quarter should reveal more about that trend."

But Kurt Carlton, New Western's president, noted that this market always had higher interest rates than owner-occupied properties, and as a result, they did not move up as much.

"Rates have only moved about 100, 150 basis points in our world," Carlton said. "They've come down from 14-15% in 2008 to what they are today, which is about 10%."

That is because most of the lenders in this area are semi-regional, small originators and they are "pretty well isolated from the mortgage bond market and all the different things that are driven by the Fed changes," he added.

Furthermore, many are funded by family offices that are satisfied with a return of at least 10%. It is an area that has not been as disrupted by the Federal Reserve's quantitative tightening like traditional mortgage lending has been.

The marketplace is now being launched in 45 markets, Carlton said. It has been active primarily in three areas — the Carolinas, Tampa-St. Petersburg and Philadelphia — and so far has contributed to nearly 2,100 closed loans representing over $450 million in total volume. Currently Sherman Bridge has 15 lenders participating.

For lenders looking for an opportunity in 2024, fix-and-flip financing is a good market to get involved with, said Carlton, who estimated that a fifth of all transactions right now are with property investors.

While high interest rates are contributing to a decision for potential sellers not to list, "in our space, generally these properties have to be sold," Carlton said, citing as examples a house that has been damaged by fire or was inherited and requires repairs to make it habitable again.

Looking long-term, New Western and Sherman Bridge are tracking what he terms "the Great Renovation," when much of the 25 million homes built prior to 2008 have been aging and those are going to need fixing.

"A house built in 1993 is now 20 years old," he said. And it is not just the natural aging process, but many property owners deferred maintenance over the years as they age in place.

"A lot more houses are getting to the stage where they need repairs beyond what a traditional homeowner has the capabilities or desire to do and they're ending up in the hands of investors and we're seeing a greater trend towards this," Carlton said.

New Western/Sherman Bridge isn't the only lender looking to increase support for this portion of the investor market.

NewPoint Real Estate Capital has created a lender to support the single-family build-to-rent sector through short-term bridge loans.

Named NewPoint BTR, it will support both purchase and refinancing as the property owner goes through the lease-up and stabilization period. These non-recourse loans are structured for take-out with an agency or other permanent debt solution.

"Built-to-rent communities play an increasingly important role in the housing market," said David Brickman, NewPoint's CEO, in a press release. "Our investment in a build-to-rent financing platform demonstrates NewPoint's ongoing commitment to supporting all sectors of the rental housing market in the U.S."

Loan amounts are for between $10 million to $50 million and secured by purpose-built communities of SFR properties of these types: townhomes, attached homes and detached homes.

NewPoint Managing Directors Matthew Zall and Michael Golfman are serving as co-heads of the new lending platform.

Meanwhile, Rithm Capital's asset management business is partnering with Darwin Homes, a subsidiary of Pagaya Technologies, to create Adoor Property Management LLC. It will now be responsible for Rithm's Adoor LLC's build-to-rent and single-family rental homes.

Rithm is in the process of beefing up its asset management business through the contested acquisition of Sculptor Capital Management. Some industry analysts believe that will bring Rithm one step closer to a public offering for its mortgage business.

APM allows Rithm to focus its efforts on capital allocation and strategic decision-making.

"This partnership significantly enhances our real estate investment platform by incorporating technology- driven property management capabilities," said Charles Sorrentino, managing director, head of investments at Rithm, in a press release. "By continuing to develop Adoor into a vertically integrated platform, we are well positioned to grow our portfolio of high-quality homes and meet the increased demand for accessible and affordable rental housing."