The Leverage Begins- As Home Flipping Declines, Money Lenders Expand

Home “flipping” can be profitable, but it is also very risky. This risk can be compounded by many things. It becomes very high when one is using borrowed money to finance the rebuilding and repair, as it assumes that there will be enough cash generated by the sale of the house to pay off the loan and turn a profit.

This assumes, of course, that the house can be sold reasonably fast. It also assumes no serious market interruptions. If such were to happen, many people would lose their life savings as they would be unable to put up the physical cash to service their current debts and will be forced to bankruptcy.

I noted that “house flipping” has greatly declined amid the increasingly saturated market, suggesting economic troubles. Now those who are still in the market are witnessing the expansion of “hard cash” lenders, who are lending money to persons financing house flipping at rates as high as 90% according to a report:

The American Association of Private Lenders says the number of hard money lenders is approximately 8,300, up 40% since 2016, reported Bloomberg.

A hard money loan is an asset-based loan financing through which a borrower receives capital secured by the property. The volume of these loans to house flippers last year rose to $20 billion. That’s up 37% from 2016 and about double the figure from 2014. ATTOM Data Solutions believes hard money is a significant source of lending for house flippers.

“There’s a lot of activity. Every time I turn around there’s new entrants,” said Glen Weinberg of Fairview Commercial Lending in Evergreen, Colorado.

While Weinberg usually loans up to 60% of a property’s value, some newer lenders will go up to 90%, he said.

Blackstone Group LP and Goldman Sachs Group Inc. recently dove into the hard money lending space, drawn by interest rates of 8% to 12%.

About ten years from the real estate trough in 2009, the outlook is starting to seem worrisome for flippers and their hard money financiers.

ATTOM Data Solutions published a new report earlier this month called Q1 2019 US Home Flipping Report, which shows house-flipping volume rebounded across the country earlier this year as gross profits and return on investment fell.

In Atlanta, house flippers want to put up smaller down payments than ever before, said Michael Braswell, a broker who works with hard money lenders.

“I would say, probably more than half the deals that come across my desk are not viable deals,” Braswell said.

Nationwide, 49,000 homes flipped in 1Q19, represented 7.2% of all home sales last quarter, up from 5.9% MoM and up 6.7% YoY, the highest home flipping rate since 1Q10. While this could be interpreted as a sign of continued progress, it also may suggest that investors are unloading their homes while they still can, Attom’s Todd Teta told Bloomberg this month.

The West Coast has seen some of the most significant house flipping declines in the country.

Bloomberg said hard money lenders aren’t forecasting a downturn in the real estate market just yet, but as we have mentioned before, many have overlooked the economy cycling down into 2H19.

As Zerohedge readers would know, any disruption in hard money lending and or a downturn in the house flipping market would be a ‘canary in the coal mine’ that could suggest the overall housing market will continue to deteriorate into 2020. (source, source)

This sort of high-risk lending and the expanding of financial “services” is what happened prior to the economic problems of 2008. People made giant debts and then could not pay them. Many of those debts involved houses and automobiles. This destroyed the American consumer and annihilated the economy to such an extent that it has yet to recover, even after a decade.

As I have explained before, the economy is in a “dead cat bounce” type scenario where the decline is not going to stop because of fundamental economic issues of which it is unlikely they will be changed for political reasons. It is a long-term and systematic issue rather than one of “job creation” or, as the big word was a decade ago, “stimulating” the economy, for it is not possible to cure a disease on a corpse to revive it from the dead.

To the wise, this is not a good time to purchase homes. Rather, it is the time to save money so that once the collapse does come to pass, one with saved assets will be able to buy up houses at cheap prices as there will be a massive decline in value on the return to equilibrium.

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