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said that although Rubicon was focused on the San Francisco Bay Area

Time:2017-10-26 04:31Shoes websites Click:

Flip Into market push Investors

New York Times News Service

House flipping, which declined after the financial crisis in 2008, is on the rise again, thanks to low interest rates and rising home prices. And with the renewed interest comes investors looking for a high return.

But the real estate strategy — in which a home is bought, renovated and resold quickly — requires fast access to money, and developers are willing to pay higher interest rates for it. The loans are backed by the property and are short, typically running for a year or less. And the funds that finance them offer reliable returns of about 8 percent, for those who can meet minimum investments, generally $100,000.

The finance industry around house flipping has been active for decades, and it has been ticking up lately. Last year, 5.7 percent of all home sales were flips, the highest level since 2006, according to Attom Data Solutions, a national property database. The trend, popularized on TV series like HGTV’s “Flip or Flop” and “Flipping Out” on Bravo, is attracting the interest of Wall Street: Last week, Goldman Sachs bought Genesis Capital, a leading lender to house flippers.

But the loans — sometimes referred to as fix-and-flip or hard-money loans — come with risks, including developers unable to pay them back and a drop in real estate prices that could make properties hard to sell or even rent.

Chris Gutek, a former equity analyst at Morgan Stanley who has been an independent investor in Grand Rapids, Michigan, for the last decade, said he lost money on loan funds in 2008, but remained bullish on the sector.

“I was getting nice 12 to 13 percent interest for a few years, but I had one very bad experience in 2008,” Gutek said. “I lost a bunch of money. It was not good underwriting.”

Funds set up these days by lenders like Genesis Capital in Los Angeles and Anchor Loans in Calabasas, California, say they are more transparent and conservative in their underwriting. He has put about 20 percent of his liquid assets in a fund managed by Broadmark Capital, an investment bank in Seattle that has $350 million in 200 short-term loans.

“Since 2009, the fund hasn’t been tested, and I’m very, very aware of that,” Gutek said. “There is some risk that real estate values will reset, but I feel good about the meaningful investment process.”

For skeptics, the quick turnaround on real estate speculation might evoke the go-go thinking that led to the mortgage crisis just a decade ago. But investors say hard-money loans are more stable than a bank mortgage because they are secured by properties at a lower loan-to-value ratio, a risk assessment used by lenders.

The average loan-to-value ratio in the industry is about 55 percent, compared with 75 percent to 80 percent for a typical mortgage. This provides a substantial cushion to protect against a property falling in value. It also ensures that developers do not walk away from the properties because they have put a substantial amount of their own money into a project.

“When the loan matures, let’s say it’s 11 months, we want our borrower to be successful,” said Stephen Pollack, the chief executive and president of Anchor Loans.

If the developer runs into a problem, “we’ll try to help them come up with a solution,” he said. “Maybe we’ll ask them to put a tenant in there and take out a rental loan. But if the risk of the loan has changed and it’s at a higher leverage amount, we want to do something to get us in a safer position.”

In other words, the developer needs to put more money in, which Pollack said most of them agree to because they want to continue their relationship with Anchor.

And because the length of the loan is shorter than a mortgage, the risk is smaller.

“There’s an asset bubble in stocks and a bond rally,” said Shannon L. Saccocia, managing director of Boston Private Wealth. “Is this creating the opportunity for another bubble in real estate? The reality is for us, given the short duration of the loans, they’re easy for us to monitor. They’re very different from securitization.”

To make their portfolios more stable, some lenders diversify across several states so they are not stuck in one market or move into different types of real estate, like retail and land.

“The benefit for a high-net-worth investor coming in is, they’re instantly diversified,” said Joseph L. Schocken, president of Broadmark Capital. “And to have that kind of diversified portfolio producing the yield we’ve produced — roughly 11 percent — is very unusual. What will get your attention is the stability.”

His firm runs two funds and is about to start a third. All three focus on booming cities like Atlanta, Denver and Seattle. He said his goal was to make the book of loans as transparent as possible.

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