Evolving into a nationwide phenomenon with meaningful benefits for both investors and the communities they serve, the real estate investment landscape experienced steady growth between 2013 and 2023, primarily due to local mom-and-pop investors. Growth in real estate investment also creates opportunity for mortgage originators. These deals can be funded with residential transition and debt-service-coverage ratio (DSCR) loans.

“Despite the near-term headwinds in the market, the future is bright for real estate investors.”

 Knowledge of this market is a useful tool if you currently offer these products or are considering them for your arsenal. Real estate investing has a deep history, presents unique loan scenarios and promises a bright future.

Market history

Fix-and-flip home renovations might be a ubiquitous concept today, thanks to HGTV. But the phenomenon of acquiring properties to update and resell them really took off in the 1980s, when economic downturns and dwindling stock market returns led to a surge in home foreclosures.

Rather than let these properties go to waste, investors took notice of the profitable opportunity. They began purchasing foreclosed homes with the intention of renovating and reselling them for a profit once the housing market showed signs of recovery.

Throughout the 1980s and ‘90s, this trend was propelled by private financing that fueled a growing interest in renovation of older properties. Inspired by TV shows like “This Old House” and encouraged by emerging retail giants like Home Depot and Lowe’s, many new homeowners began to undertake DIY renovation projects that paved the way for the YouTube channels and TikTok videos of the modern era that are focused on house flipping.

Today, flipping is seen as a viable profession as investors have gotten the cycle of purchasing, renovating and reselling properties down to a science. The financial crisis of the late 2000s triggered a surge in private debt as the primary financing source for individual real estate investors, especially in the fix-and-flip sector. Private lenders began offering short-term bridge loans that became a hit for borrowers, due to the quick approvals and more lenient credit criteria when compared with traditional financing methods.

Trends over time

According to real estate analytics company Attom, the percentage of homes purchased for flipping purposes rose from 5.8% in 2020 to 8.4% in 2022. These investments yield varying returns but generally prove profitable, with year-end 2022 Attom data showing an average gross profit of $67,900.

Where these investments are happening has changed a lot in the past decade. The most popular residential markets of 2013 — including Houston, San Francisco, and Bethesda, Maryland — have now been superseded by markets like Atlanta, Raleigh and Dallas-Fort Worth, which topped the National Association of Realtors’ 2023 list of the hottest markets. Fix-and-flip transactions have increased from 4.6% of all U.S. single-family home sales in 2013 to 7.2% of all sales in third-quarter 2023. The current wave of fix-and-flip activity is being driven by several trends.

First, an increasing number of households are seeking move-in ready homes, driving the demand for renovated single-family properties. Existing home inventory has decreased steadily over the past decade. Although supply entered an upswing from the ultra-low inventory early in the COVID-19 pandemic, the 3.6 months of supply at the current sales rate in October 2023 was down from five months a decade earlier. Low supply has created opportunity for real estate investors to provide housing solutions.

Second, 60% of real estate investors are small-scale, mom-and-pop investors and business owners who prioritize investments in their local communities, according to Kiavi data. They play a pivotal role in revitalizing neighborhoods through renovation and repurposing of under-improved homes, bringing a community-based mindset to their projects.

Third, sustained demand for rental housing has created a steady stream of cash flow for real estate investors. The number of single-family renter households has increased from 40.2 million (or 30%) of all U.S. households in 2013 to 45.2 million (or 35%) in 2022, per census data. This provides investors with a consistent source of income.

Lastly, the aging U.S. housing stock presents an opportunity for real estate investors to renovate older homes and meet the growing demand for turnkey properties. This helps create more affordable housing options and future opportunities for homeownership.

Short-term forecast

Technology and data are the future of real estate investing. Data-driven technologies, including advanced artificial intelligence (AI) and machine learning models, are set to empower investors by dismantling traditional borrowing hurdles, automating time-intensive processes, and delivering swift and more tailored financing.

Today’s borrowers want access to personalized, transparent pricing and on-demand capital. Advanced technologies synthesize extensive data sources to reveal insights that enable investors to make faster, more informed decisions. Precise assessments of factors such as after-repair value ultimately increases the likelihood of success for each project. This efficient use of data clarifies potential risks and rewards, providing a structured pathway for investors to have lucrative and successful projects.

AI and machine learning models are becoming more sophisticated, providing clarity to lenders about primary risk factors tied to the investor, property and local market conditions. These models create better overall outcomes from an underwriting perspective and empower investors to successfully exit projects.

Although interest rates won’t be returning to historic lows anytime soon, there remain plenty of opportunities for investors looking to grow their business. Given the low inventory of homes for sale and the number of buyers looking for move-in ready homes, fix-and-flippers did well in 2023. And we can expect to see this trend continue in the coming years.

Despite the near-term headwinds in the market, the future is bright for real estate investors. From fix-and-flip projects to long-term rentals and new construction, each real estate investment helps to revitalize neighborhoods and provide much-needed turnkey housing, all while enabling investors to achieve their wealth-creation goals. ●

The post A Decade of Transformation and Growth appeared first on Scotsman Guide.

These factors may force them to unload their properties at bargain prices in the near future if they are unable to restructure their mortgages. While these circumstances have proven difficult for some property owners, they have also provided opportunities for investors who have the capital and the expertise to buy distressed properties.

“Shopping centers that are anchored by grocery stores or big-box retailers, such as The Home Depot, were quite resilient during the COVID-19 pandemic and continue to be strong real estate investments.”

The question for commercial mortgage brokers whose clients want to buy real estate then becomes, which of these distressed property types is the most favorable to their needs? One category not to be overlooked is retail — specifically, open-air community and neighborhood shopping centers.

Resilient properties

Shopping centers that are anchored by grocery stores or big-box retailers, such as The Home Depot, were quite resilient during the COVID-19 pandemic and continue to be strong real estate investments. In recent years, in fact, restaurant and retail chains that traditionally stayed in urban markets have suffered from diminishing foot traffic in the urban core due to office workers embracing remote work. As a result, they have been drawn to the well-located, suburban shopping center for greater access to consumers.

Not all centers are flourishing. When one of these properties is considered distressed, it is typically due to one of the anchor tenants going dark or because high interest rates are preventing the owner from servicing the debt. And not every distressed property is equal. Experienced investors often prefer to buy a shopping center with characteristics that the new owner can enhance.

One important characteristic, naturally, is location. Acquiring an existing retail property on a busy thoroughfare allows the new owner to focus on ways to create added value through renovation or expansion. Another technique is remerchandising, which involves the landlord rethinking the shopping center to bring in the most popular retail uses to fill vacancies and replace tenants as leases expire. This may include leasing to health care storefront providers, educational uses and even fast casual restaurant concepts.

Prospective buyers often seek short-term loans from regional banks to cover the costs of acquisition and renovation. Within a year or two, they’ll typically seek permanent financing from a CMBS source or an institutional lender, a trend to watch today as interest rates return to more reasonable levels in the second half of 2024 or in 2025.

Getting started

Before a buyer invests in an existing retail center, it is important to know every aspect of the property and analyze how best to enhance the project to increase value. One of the first factors to consider is how to raise the equity needed to buy the asset.

The best place to start is with the potential owner’s circle of friends, family members and other high net worth individuals in their local community. The buyer can sell this group of investors an equity stake in the new venture. This way, the partners can share the profits of the acquisition and benefit from joint ownership.

Another challenge to overcome is raising the debt capital. A mortgage broker can help the potential buyer understand all the nuances relating to the availability of capital, the interest rate environment for the type of acquisition and how to structure the loan.

It’s also crucial to know the market in question. Brokers should advise borrowers to invest in properties near where they and their business partners live. This way, the owners can easily visit and assess the performance of both the property and individual stores.

Know the property

Three aspects of a property that potential owners need to pay attention to include the site’s layout, location and accessibility. How a shopping center is laid out — including which side of the road it’s on, and how easy it is to enter and exit — make a major difference. Shopping centers that run parallel rather than perpendicular to a main road are much more viable in attracting shoppers. They offer tenants more visibility to potential customers driving by.

Also, it’s usually best to be on what’s sometimes referred to as the “going-home” side of the road. Many people like to shop after work and prefer to take a right turn into a shopping center, rather than a left turn against traffic. Of course, other businesses, such as Starbucks or Dunkin’, fare better on the “going-to-work” side of the road since they offer what morning commuters crave.

The size of the project is another key factor. Potential owners and their investor partners won’t have an endless supply of money, so the size of a shopping center they want to purchase makes a big difference. A general rule is that a retail asset of 10,000 to 50,000 square feet is a good starting point for first-time investors. These are considered strip convenience centers. Novices should stay away from projects of 100,000 square feet or more until they are more established and experienced.

Potential buyers should examine all existing leases. Each tenant in the retail center has a lease, so investors should read and understand these agreements prior to their purchase. Also, read any correspondence in the tenant files that would indicate promises made outside of the lease. If most tenants have relatively long lease terms, or they hold options for renewal at preset, below-market rental rates, there is little owners can do to grow revenue and show added returns to their investors.

Look for growth

Investors should look for properties that offer the potential for improvement and expansion. This might be counterintuitive, but shy away from stable, successful properties. They aren’t likely to give the new owners and investors the opportunity to add enough value to provide the investment returns they desire.

Instead, prospective buyers should look for a fixer-upper property that can be upgraded. They might create additional value with new landscaping or signage, repainting or other measures. Also, determine whether the center can be expanded. Increasing the size of the shopping center is one tried-and-true method used to increase cash flow and asset appreciation. An expansion project doesn’t have to be big. It can be as simple as adding a fast-food restaurant in the parking lot facing the road.

As with any real estate investors in learning situations, commercial mortgage brokers should caution clients about doing their homework before plunging into a shopping center investment. The retail landscape is changing constantly. To succeed, you must be prepared to change with it. Time does not stand still, not even for a day. ●

The post The Allure of the Shopping Center appeared first on Scotsman Guide.

“Before sprinting off to initiate a 1031 exchange, the property owner should be wary not to overstep the boundaries, however broad they may be.”

The tax exchange is a complex strategy that must be understood completely before attempting and requires the help of a qualified professional. It has the potential of deferring both capital gains and any gains received from the sale of depreciated capital property that must be reported as income. Commercial mortgage brokers should be familiar with the 1031 exchange and how it works so they can better advise clients on whether they should use it to defer real estate taxes.

Deferred taxes

The 1031 exchange allows a property owner to “swap” one asset for another that is considered “like-kind.” Since the money never graces the investor’s pocket, any capital gains tax is suspended until the gains are eventually cashed in.

This scenario can be used repeatedly, with the seller rolling over the gain from one investment property to another. Even if there is a profit on each swap, the taxes are deferred until the buyer sells for cash at some point in the future.

This is a simplified explanation, and there are many nuances to the IRS regulation that must be understood, but it illustrates the basic function. By postponing tax payments, investors can trade with the full value of their properties — as long as they keep in mind that the IRS will eventually be owed the deferred gains.

As every investor knows, money now is always better, because a dollar in hand is a dollar that can be invested to grow wealth. Tax dollars will forever be tax dollars, but if they can be put to work for the investor before they go to Uncle Sam, so much the better.

Crucial details

A common question involves which types of property qualify as like-kind in a 1031 exchange. The term is ill-defined, but it essentially describes a tax-deferred transaction that allows for the disposal of one asset and the acquisition of another similar asset. Fortunately for the investor, the definition is quite open-ended. For something to be like-kind in real estate, it only needs to be some form of real estate, although primary residences do not qualify.

Before sprinting off to initiate a 1031 exchange, the property owner should be wary not to overstep the boundaries, however broad they may be. While most real estate is like-kind to most other real estate, it is like-kind only to real estate. For instance, the program doesn’t cover securities (such as stocks, bonds or notes), other evidence of indebtedness or interests in a partnership.

The 1031 exchange program has many rules that must be closely followed. For instance, in most cases, the process is classified as a delayed exchange in which one party will sell a property and then store the proceeds with a qualified intermediary, who is an independent and neutral party with no ties to any of the other parties involved. The intermediary holds the relevant money in an account that the seller cannot access.

Within 45 days of the sale of the first property, the former owner must designate the replacement property to the intermediary. The seller must then close on the replacement property within 180 days of disposing of the first property. Money left over from the transaction is taxed as partial sales proceeds. To offset the potential tax bill, the property buyer needs to demonstrate debt equal to or greater than what was paid off upon sale of the relinquished property.

Dubious connections

Due to the potential for tax avoidance, there are extensive guidelines in the tax code that require an expert’s guidance concerning “related parties” who enter an exchange. This term has a wide definition, ranging from family members to partnerships, corporations, trusts and entities in which more than 50% of the stock or capital interest is directly or indirectly owned by the taxpayer.

It is possible for related parties to use a 1031 exchange, but there are strict rules governing the procedure and it’s usually not advisable. Generally, buying property from a related party and selling it to an unrelated party is not allowed.

For related parties to qualify, they need to follow three conditions: They must hold the properties for a minimum of two years following the exchange; transaction details such as the sales price and rental income must be at prevailing market rates; and the taxpayer must be able to prove that the transaction did not result in tax avoidance through an income tax basis swap. There are other exceptions, but any property owner looking to avoid the prohibitions should seek professional help to make sure their financial plan is legal.

● ● ●

For those in the business of real estate investments, 1031 exchanges can be a vital tool to defer capital gains and taxes, freeing up money for current ventures. It’s crucial for mortgage brokers to recommend that clients find qualified advisers and thoroughly understand the process to avoid running afoul of the IRS. Doing so can mean the difference between financial growth and legal trouble. When it comes to the IRS, due diligence is always a must. ●

The post Understanding the 1031 Exchange appeared first on Scotsman Guide.

From April through June, flips represented 8% of all sales, down from the 9.9% share seen in Q1 2023 and down from the 8.9% share in Q2 2022. While this was still a high rate, historically speaking, the decline is a trend to watch. Notably, the average time from investor purchase to resale for a home flip increased to 178 days in the second quarter, marking the longest period since mid-2020.

Despite the longer time to resale, raw profits and returns on investment (ROI) increased for a second quarter in a row, marking signs of recovery from a slump over the prior two years. ROI climbed by nearly 5 percentage points between the first and second quarters, the fastest pace since 2020, while raw profits jumped by 18% in the same time frame, a quarterly spike not seen in the past 10 years.

These improvements mirrored the housing market at large. The single- family median home price rose by 10% during the spring buying season, following steady declines from mid-2022 through early 2023.

In fact, the gross profit on the typical home flip (the difference between the median purchase price paid by an investor and the median resale price) rose to $66,500 in Q2 2023, up from $56,250 in the prior quarter. This was a significant year-over-year decline of 35%, however, as the gross profit on a typical transaction in Q2 2022 was $102,063.

The typical gross profit for a flip in the second quarter represented a 27.5% ROI compared to the original purchase price. This marked a turnaround from the 22.9% ROI posted in Q1 2023 and the recent low point of 22.3% in Q4 2022. It was still far below the peak ROI of 61% in Q2 2021, but fix-and-flip profits are seeing a clear and steady uptick.

The typical resale price for a flipped home rose by 2.1% between the first and second quarters to reach $308,500. This contrasted with a 1.6% decline in the median purchase price for the investor during the same period. And it was a reversal of the trend in which prices and profits for fix-and-flip projects ran counter to the U.S. retail housing market, which has seen an extended boom for the past decade.

Although the rate of home flips dropped in the second quarter, real estate often remains a local endeavor, and investors should make note of the places where flips are thriving. Attom analyzed metro areas with a population of 200,000 or more that had at least 50 home flips in Q2 2023. The top-five metros included Macon, Georgia (where flips accounted for 16.8% of all home sales); Columbus, Georgia (15.3%); Spartanburg, South Carolina (13.5%); Atlanta (13.5%); and Akron, Ohio (12.5%). Among metro areas with a population of 1 million or more, the highest shares of flips were recorded in Atlanta, Memphis, Jacksonville, Cincinnati and Phoenix.

In addition, some metros are providing bigger returns on investment for these projects. In Q2 2023, these locations included Akron, Ohio (116.7% ROI); Pittsburgh (112.9%); Scranton, Pennsylvania (93.7%); Hagerstown, Maryland (86.6%); and Trenton, New Jersey (85%). In metro areas with populations of at least 1 million, the highest ROIs were found in Pittsburgh; Baltimore; Philadelphia; Rochester, New York; and Richmond, Virginia.

Although there are many positive signs for the fix-and-flip market, uncertainties remain. The increases in gross profits and margins are heartening, despite the decline in the flip rate. But it remains to be seen whether these pricing improvements are a reflection of the yearly bumps seen during the busy spring purchase season or are representative of a more lasting measurement for profits on a home flip project. ●

The post Retail price increases didn’t harm fix-and-flip profits appeared first on Scotsman Guide.

That’s a larger yearly decline than the one for the market at large, with overall home purchases falling 22.2% year over year during the same time frame, per Redfin’s data. Investors bought 48,667 homes from July through September, marking the fewest investor purchases of any third quarter since 2016.

On a dollar volume basis, investors bought $36 billion in homes in the third quarter, down 19.5% year over year. The typical home bought by an investor saw its price rise from $449,895 in Q3 2022 to $475,115 in Q3 2023.

Investors have pulled back faster than consumer homebuyers for a variety of reasons, including the big one-two punch of rising home prices and heightened interest rates that have decimated the entire residential market. While mortgage interest rates impact the investor market less than the overall market — 71% of investor purchases in Q3 2023 were all cash — elevated rates still take a toll because a portion of investors take out loans to cover non-mortgage expenses.

Investor activity has also been subdued simply because it has become harder to make a profit in the current environment. Redfin reported that many sellers are being forced to cut their list prices to accommodate demand, making it more difficult for an investor to justify their initial purchase at a higher price. The investors who buy homes to earn rental income are also cooling their jets as rent growth has softened and vacancies have increased.

Subsequently, investor market share has dwindled from 17.6% in last year’s third quarter to 15.9% this year. It’s worth noting that this share is still higher than its pre-pandemic level, but it isn’t projected to see a meaningful increase in the near term, said Redfin senior economist Sheharyar Bokhari.

“We don’t expect investors to dive back into the market in a big way anytime soon,” Bokhari said. “Borrowing costs are unlikely to fall significantly in the near future, and while home prices may soften a bit, they probably won’t cool enough to bring back a critical mass of investors.”

Heather Mahmood-Corley, a Redfin agent in Phoenix, said that she’s seeing more investors selling than buying.

“The investors who bought up all the Airbnbs are selling — some are institutional investors and some are mom-and-pop investors who got in over their heads,” she said. “They’re selling because the Airbnb market isn’t as strong as it was during the pandemic, and in some areas, new rules on short-term rentals have made owning them less attractive. There are also just a lot of unknowns right now, so some people want to get rid of their investment properties so they don’t have to deal with the uncertainty.”

The post Investor activity plunges by nearly 30% year over year appeared first on Scotsman Guide.

Seventy-two percent of investors polled by RCN and market intelligence firm CJ Patrick Co. said that market conditions for investors are the same or better than they were one year ago. Three-quarters of respondents indicated that they believe conditions will either remain stable or improve over the next six months.

Investor views on the current landscape is decidedly rosier compared to the spring iteration of the survey. Forty-nine percent of the participants in the most recent survey said that conditions are better than they were a year ago, compared to only 30% in the spring.

“Despite higher home prices, higher financing costs and limited inventory, real estate investors continue to express optimism about market opportunities today and in the months ahead,” RCN Capital CEO Jeffrey Tesch said. “Investors continue to play an important role in the housing market. According to a recent report from CoreLogic, more than one in four home sales is to an investor, and we continue to see interest from both rental property buyers and fix-and-flip investors in our business.”

“Interestingly, fix-and-flip investors seem much more optimistic about future opportunities – 50% of them believe that conditions will improve over the next six months compared to just 24% of rental property investors,” said Rick Sharga, CEO of CJ Patrick Company. “That may be an indication that flipping activity has bottomed out but may also be a reflection of current challenges in the rental market, with rates continuing to decline even as more rental inventory comes online.”

Enhanced optimism, however, doesn’t necessarily mean that investors are playing looser with their funds. RCN’s survey suggests that investors still plan on being judicious with their capital, with only 22% planning to buy more properties than they did one year ago. Thirty-nine percent plan to buy the same number, with another 39% saying they will buy fewer properties than they did at this time last year.

High capital costs were the No. 1 current obstacle identified by investors as nearly 76% of respondents cited them as a hurdle to the investment market. Lack of inventory, at more than 42%, was mentioned by the second-largest share of investors, followed by competition from institutional investors at 33%, competition from consumer homebuyers at 29%, difficulty securing a loan at 22%, and supply chain delays at 22%.

The post Real estate investors see better conditions than last year, optimism for next six months appeared first on Scotsman Guide.

The first real estate sectors to slump in a bear market are retail and office spaces. As we all know, offices are taking a major hit right now. Go into any large office building in any major city and make a note of all the empty spaces you see. Whether you’re visiting Florida, Pennsylvania, Southern California or Texas, this trend is more or less the same.

Nowhere is the office-space crisis felt more profoundly than in New York City. Edward Glaeser, chairman of Harvard University’s economics department, and Carlo Ratti, the director of MIT’s Senseable City Lab, recently reported that there is nearly 75 million square feet of vacant office space in the Big Apple alone. That’s enough space to fill more than 26 Empire State Buildings.

Repurposed offices

New York isn’t alone. Chicago is estimated to have nearly 60 million square feet of vacant office space, while Los Angeles has another 44 million square feet. This trend appears to be set to continue through the end of this year, making now a good time for interested parties to make low-ball offers on office buildings while continuing to monitor the market closely.

The end of 2023 could prove to be a good time to look at office property investments, so brokers should watch how this sector shifts. For instance, good deals might appear for buildings that go into foreclosure, but caution is appropriate given the current headwinds.

It appears that repurposing may be required to redeem some of these vacant properties. Therefore, mortgage brokers and their investor clients should approach these deals with a plan to add value by finding different, innovative uses for obsolete office space. One idea is to create virtual work pods or coworking spaces with amenities for remote workers.

Repurposing, however, can raise daunting challenges. For one thing, it can be expensive. For another, the many localized permitting processes have made it increasingly complicated to rezone a property for other purposes. Those who undertake a repurposing project need to make sure the zoning is correct for their needs. Otherwise, they need to be confident that they can get the property rezoned.

Some real estate observers have suggested that empty office buildings can be converted into residential units, pointing to the high demand for housing. Unfortunately, zoning regulations may be a hindrance and some of these properties can’t be converted due to underlying architectural issues. Other spaces would be so costly to convert that it wouldn’t make economic sense. As Moody Analytics recently concluded, “The office-to-apartment conversion trend will likely be a minor one, unless office values and rents see some major, permanent decline after the pandemic.”

Housing opportunities

Investors who tackle projects of this nature need to make sure they find people with the right experience who can do a deep, detailed cost analysis and suggest changes that are likely to be lucrative. Not many people have this kind of background. It would also be wise to have plenty of capital on hand. While each project is unique, investors should prepare for a repurposing process to take an estimated one to two years.

According to Zillow, July 2023 rents for all types of housing were 3.6% higher than one year earlier — and it appears that prices will continue to climb. As apartments increase in value, so do their tax assessments, and landlords tend to pass these and other expenses on to their tenants. Plus, the number of available units remains below market demand in many places, while rising mortgage rates have pushed homeownership out of reach for many renters.

For these and other reasons, apartment buildings will continue to be attractive to investors, and they’ll remain a good option for those seeking strong and stable cash flows. In addition, we may see more people look to economize by moving into smaller, less expensive units and by putting things into self-storage units. This is why new construction of self-storage facilities can be a good investment in the near term.

Indeed, new construction of housing, in general, gives investors the ability to make larger returns. This is because tax incentives can help support new construction. Buyers may be able to get their property’s valuation raised after construction, thereby increasing their equity almost instantly.

Farmland option

Mortgage brokers should also be discussing farmland investments with their clients. The nation’s farms offer a promising revenue stream.

The U.S. Department of Agriculture (USDA) reported that the average price per acre for cropland jumped by 14.3% from 2021 to 2022. Average prices in Kansas and Nebraska rose by more than 20%. These price gains are due to numerous factors, including a worldwide food shortage, robust crop prices, inflation and historic government subsidies stemming from the pandemic.

Farmland is an effective hedge against inflation since food prices climb rapidly in times of accelerated inflation. Many investors also believe that commodities will continue to increase in value. The USDA predicts that 2023 food prices will rise at rates above their long-term average.

Acquiring land and vertically integrating within a farm — in other words, owning the farm’s production process and output — presents a valuable opportunity. While it’s impossible to know for sure, some observers believe that the price of farmland will continue to climb through at least 2024.

● ● ●

Commercial real estate is a constantly changing industry. Investing successfully in such an evolving environment requires constant analysis and frequent adjustments. It also means it’s important to be careful about who you trust.

Mortgage brokers need to direct clients to investments that promise a steady flow of returns regardless of market conditions. A true operator is one who buys under or off market, is always scrutinizing the deal and has a strong flow of potential deals coming in all the time. Whether or not they buy into these deals is based on market conditions.

Projecting two, three, four or even five years into the future is all but impossible. After all, who could’ve predicted the COVID-19 pandemic? What’s easy to see, however, is that buyers need to focus on the right properties in the right locations at below-market prices, in good times or bad. By doing so, anything a client acquires now is likely to grow in value in the future. ●

The post Search for the Silver Lining appeared first on Scotsman Guide.

It might be hard to believe that real estate investors, such as fix-and-flippers, are still growing their business. After all, housing inventory remains historically low and mortgage rates continue to tick higher.

“Investors of all types play vital roles in the long-term effort to address the nation’s housing shortage. Ironically, single-family investors can take advantage of low inventory to grow their businesses.”

Nationally, the number of homes for sale fell 15% year over year this past June to reach an all-time low, according to Redfin. The real estate brokerage also reported that new listings fell to 450,000 at that time, down 30.6% from a year earlier for the lowest level and largest annualized decline on record (aside from April 2020, when the COVID-19 pandemic first hit). And according to Zillow, the U.S. needs about 4.3 million more homes to meet current demand.

Adding to the gridlock is the fact that roughly four in five homeowners with a mortgage have an interest rate below 5%, while nearly one-quarter have a rate below 3%, according to Redfin. With interest rates on 30-year fixed-rate loans hovering around 7% late this past summer, nobody was moving unless they absolutely had to.

Inventory problems

Those who are interested in buying a home are watching and waiting to see if the Federal Reserve continues to raise benchmark interest rates in an effort to fight inflation. Prospective buyers may also have to contend with a reduction in lending activity in light of the failures earlier this year of Silicon Valley Bank, Signature Bank and First Republic Bank.

Builders are attempting to make a dent in the ongoing housing shortage, with the National Association of Home Builders reporting a seasonally adjusted annual rate of 983,000 single-family construction starts in July 2023 (up 6.7% year over year). But in spite of significant homebuilding and rehabilitation activity in recent years, there are roughly 16 million vacant homes in the U.S., and it’s a good bet that a large percentage of these need renovation.

“In spite of significant homebuilding and rehabilitation activity in recent years, there are roughly 16 million vacant homes in the U.S., and it’s a good bet that a large percentage of these need renovation.”

On the positive side for housing supply is that independent investors are finding these homes, fixing them up and reselling them to owner occupants in the middle-income range, helping to close the inventory shortage. Independent investors are projected to revitalize 350,000 homes in 2023.

In short, these small, localized investors are taking matters into their own hands and opportunistically filling in the gaps in housing inventory when government bodies and homebuilders fall short. To better accomplish these tasks, these people need financing.

Use of leverage

Historically, many independent real estate investors have used cash to acquire and rehab properties. But despite recent interest rate hikes, investors have grown more comfortable using leverage to fund their deals. Often, this backing comes from private lenders that are usually faster and more flexible to fund a project than conventional lenders like banks and credit unions.

In doing so, investors can reduce the amount of cash they put into any single property, and they can use the loan to complete the purchase and rehabilitation process or pull cash out of a prior investment. Debt also allows them to do more deals and grow their business with higher returns on equity. In fact, the BRRRR method (buy, rehab, rent, refinance and repeat) is predicated on the sensible and efficient use of debt to build rental portfolios and long-term passive income.

Even investors who already use debt seek diversity when it comes to loan products. They need access to nimble and experienced lenders that offer a variety of loan programs tailored specifically to their real estate investment strategies. On a fix-and-flip project, an investor might need a residential transition loan, which is a way for them to pay for construction, repairs and other business expenses.

With a buy-and-hold rental property, an investor might need a rental landlord loan, also known as a debt-service-coverage ratio (DSCR) loan. This is a type of nonqualified mortgage that uses the rental income generated from an investment property to qualify the borrower.

Each of these loan types are typically underwritten based on the borrower’s credit score, liquidity and experience. They are capped at a percentage of cost (purchase price plus repairs) or after-repair value. DSCR loans are also based on how much a property’s rental income covers the required principal and interest payments.

Alternative options

Investors need lenders with varying appetites for risk. Mortgage brokers should help these clients connect with reliable sources of capital and a proven ability to execute. Deals can happen quickly and investors are often looking for better funding options even as they’re closing a transaction.

Different types of real estate also require different lenders and programs. At any point, an investor might need a residential transition loan, which could take the form of a pure bridge loan, a DSCR loan, or a variety of niche products that support multifamily housing, mobile homes, raw land or ground-up construction.

Many investors also operate across multiple markets. While fix-and-flippers usually renovate homes in their own backyards, or specialize in a city or region, they can range far and wide to find the most profitable opportunities and diversify risk.

Buy-and-hold rental investors may build portfolios in multiple cities where they can find value-add opportunities at below-market prices. They may buy in markets as diverse as Boston, Dallas, Houston and Charlotte, and the strategies for acquiring, selling or recapitalizing these properties can vary significantly — hence the need for local lending expertise.

Strategic support

Investors of all types play vital roles in the long-term effort to address the nation’s housing shortage. Ironically, single-family investors can take advantage of low inventory to grow their businesses.

This is because they buy homes that may be uninhabitable, or those which the average consumer homebuyer simply doesn’t have the appetite or experience to renovate. Often, rehabbers also have the knowledge and resources to complete a project on time and on budget, and they make design decisions that are likely to be in high demand among most end buyers.

They can do all this work much more easily by partnering with commercial mortgage originators and capital sources that have experience and a high level of understanding of the investment landscape. They also need access to more than one lender, thus ensuring depth and diversity of mortgage programs and risk appetites.

A real estate investor might be looking to make an actual purchase while pricing a hypothetical deal (or a handful of deals) at the same time. They may be closing on one project and starting another simultaneously, and therefore need bridge financing to move quickly.

These investors can greatly benefit from a marketplace that supports their many strategies by offering multiple funding sources and programs, all with a central point of contact across the real estate investment space. This would enable lenders and brokers to more efficiently widen their originations pipeline, lower the costs of acquisition and quickly scale up their lending portfolios. In other words, such a marketplace would make it easier for mortgage professionals to up their game in an increasingly competitive landscape.

Increased speed and minimized friction are essential for lenders and brokers who seek to grow their businesses and encourage repeat customers. Borrowers will return to a marketplace when they know they can find the best available options and feel confident they are getting the best value.

● ● ●

Independent single-family home investors continue to play a critical role in the real estate market, and their impact is growing. Many iBuyers — companies that use automated valuation models to buy homes quickly — and large institutional investors have either left the playing field or have dramatically scaled back their operations for now. But the local players, knowing they can source and close attractive financing to support future growth, are leaning in and taking action with confidence.

With the housing shortage expected to continue for the foreseeable future, fix-and-flip investors will remain important drivers of inventory replenishment and growth in the market. They’ll generate a variety of attractive and repeat business opportunities for mortgage lenders and brokers for years to come. ●

The post Sprucing up the Block appeared first on Scotsman Guide.

In Episode 015 of the Scotsman Guide Author Showcase, Carl White interviews Erica LaCentra of RCN Capital about her article, “A Promising View” in the September 2023 issue of Scotsman Guide Commercial Edition.

Erica LaCentra is chief marketing officer for RCN Capital. She is responsible for planning, developing and implementing the firm’s marketing plan as well as overseeing its marketing department. After joining RCN Capital in 2013, LaCentra led a strategic rebranding to position the company for nationwide expansion. Her ongoing efforts have rapidly expanded RCN’s customer base and elevated the company to a national brand. 

The post Author Showcase: Erica LaCentra, RCN Capital appeared first on Scotsman Guide.

Originators have likely seen an increase in borrowers seeking long-term financing due to increased demand for single-family rental homes. Fix-and-flip investor activity, which relies upon short-term loans, also has been steadily improving despite market challenges.

“On the post-flip side of the equation, originators who are dialed in with investor clients also have a great opportunity to place buyers in homes that have been renovated.”

The fix-and-flip market presents a unique opportunity for originators who have yet to consider loan programs that cater to this space. For the mortgage brokers who aren’t already convinced of the strength of the home renovation market, recent trends in this sector reveal real opportunities and ways to capitalize.

After interest rates plummeted in 2020 due to the COVID-19 pandemic, flip activity skyrocketed in 2021 and 2022. Investors seized the opportunity to revamp older homes and benefit from the high demand in the housing market. According to Attom, flips accounted for 5.9% of all single-family home sales in 2021 and 8.4% of sales in 2022. But in spite of these transactions reaching a 17-year high point in 2022, investors faced notable challenges in terms of profitability.

Exercising caution

Last year, investors in the fix-and-flip space saw their gross profit margin plummet to an average of 26.9%, the lowest level since 2008, according to Attom. The data analytics company also reported that flipped homes in 2022 generated a typical gross profit of $67,900, but the margins tightened toward the end of the year.

The decline in profits forced investors to exercise caution when selecting properties for renovation. A few missteps in budgeting for a rehab project, or holding onto the property for too long before reselling, can have dire consequences and potentially lead to financial losses.

The root cause of the recent drop in profit margins was the slower increase in the median value of the homes being flipped compared to the median price that investors paid to acquire these properties. In light of the shrinking margins, there were questions as to whether investors would continue to flip homes or take a step back and wait for housing market conditions to improve. But data from first-quarter 2023 showed that fix-and-flippers were not scared away by market challenges.

Despite the profitability issues of 2022, more recent data found that conditions are improving. Attom reported that 72,960 single-family homes and condominiums in the U.S. were flipped in Q1 2023, representing 9% of all sales. This figure might seem like a small sliver of the home sales pie, but the level of activity was the second highest for any quarter since 2000, trailing only the 9.4% share recorded in Q1 2022.

Investors have also seen improvements in profit margins in 2023 after facing nearly three years of continuous declines. From January through March, the nationwide gross profit for a home flip increased to an average of $56,000, or a 22.5% return on investment (ROI) compared to the initial acquisition price. The ROI figure represented an increase of 80 basis points from fourth-quarter 2022, although it was still below the 26.9% average for all of last year.

Areas of opportunity

Home flippers can attribute the modestly higher profits to rising median resale prices, which gained momentum at the start of this year. Other areas of the housing market continue to face challenges, such as wavering values. As of this past June, U.S. home values were up slightly year over year, but they were down from year-ago levels in more than half of the country’s 50 largest metro areas. The increase in ROI for home flips bodes well for the sector.

Commercial mortgage brokers may be wondering how to take advantage of activity in the fix-and-flip market. First and foremost, originators should begin offering loan programs that appeal to these investors. While flippers often utilize cash to purchase properties, Attom reported that nearly 34% of homes flipped in Q1 2023 were initially bought with financing.

Originators should look to offer short-term loans that fund both the acquisition of the property and any renovations, which will appeal to the portion of the fix-and-flip market that utilizes financing. Also, speed is key in these cases. For originators seeking to gain investor market share, fast closings will make all the difference as these borrowers must move quickly due to the current state of the real estate market.

When trying to find this type of client, it is important for originators to know where to look across the country, since short-term investors are more prevalent in certain areas. This could mean expanding the geographic areas they typically work within, but it could also pay dividends if this is the client type they’re looking to capture.

Home flip rates in most parts of the nation are trending up. In 128 of 172 (74%) of the major metro areas analyzed by Attom, home flips as a portion of all sales saw an increase from Q4 2022 to Q1 2023. And while many metros saw quarterly increases of 2% or less, there were many others that posted substantial gains. Some of the top metros for originators to keep an eye on include Macon, Georgia, where flips accounted for 16.8% of all home sales in Q1 2023. Atlanta (15.3%), Jacksonville (15.2%) and Memphis (14.4%) also led the way for high shares of home flip activity.

Post-flip sales

On the post-flip side of the equation, originators who are dialed in with investor clients also have a great opportunity to place buyers in homes that have been renovated. Of the 72,960 U.S. homes flipped in first-quarter 2023, 11% were sold to buyers who used loans backed by the Federal Housing Administration (FHA).

This marked the third straight quarterly gain for flips sold to FHA buyers. Among the metro areas with at least 200,000 residents and at least 50 home flips in Q1 2023, the highest shares of flips sold to FHA buyers were in the California cities of Modesto, Bakersfield, Visalia and Stockton, as well as Lakeland, Florida.

Flipped properties are appealing to first-time homebuyers, many of whom utilize FHA financing due to the low downpayment requirements. Plus, these homes have been updated with modern finishes and are in move-in-ready condition. FHA loan programs are typically in the wheelhouse of residential mortgage originators, so those who expand their clientele to include investors will not only benefit with more business on the front end, but it often results in funding the resale of the property to an owner occupant.

● ● ●

Despite fix-and-flip investment challenges in today’s real estate market, things are continuing to trend in a positive direction, creating tremendous opportunities for commercial mortgage originators who want to increase their production. Brokers should be aware of the cities and states that provide the best returns for flippers if they’re looking to expand loan offerings to meet the needs of this niche market.

It’s important to keep in mind that profits for fix-and-flippers are still limited despite the positive market improvements early in 2023. Still, originators who take on these types of clients can see increased business by providing financing for the actual flips and for the sale to an end buyer. Many of these homes are being snapped up by people looking for a primary residence in a low-inventory environment. It will be interesting to see how trends play out for the remainder of 2023, but market factors continue to look promising. ●

The post A Promising View appeared first on Scotsman Guide.