Wall Street giants and individual retirees alike have pumped billions into financing home flips in recent years. Now, a slowdown in the flipping business threatens to rain on the party.
So-called “hard money,” which comes from sources other than banks and which carries higher interest rates, is hard to track because it’s fragmented and littered with thousands of small players doing one or two deals a year. However, a for-profit trade group called the American Association of Private Lenders estimates the number of hard money lenders and related “private money” lenders at 8,300, or up almost 40% since 2016.
Most of that money is bound for real estate investors. The volume of loans to people who are buying homes to renovate and resell rose to about $20 billion last year, according to real estate tracker Attom Data Solutions. That’s up 37% from 2016 and almost double the figure from five years ago. Attom can’t be sure how much of that comes from hard money sources versus banks, but industry players believe they make up a majority of such loans.
“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 he will only loan up to 60% of a property’s value, some of the newer lenders will go up to 90%, Weinberg said.
Big institutions like Blackstone Group LP and Goldman Sachs Group Inc. have gotten into the business, attracted by interest rates of 8% to 12%, as well as two or three percentage points tacked on for the lender. Today, private equity firm KKR & Co. Inc. said it would boost its commitment to Toorak Capital Partners to $500 million from its earlier $250 million investment. Toorak buys short-term home flip loans, sometimes known as bridge loans, from originators. Crowdfunding companies like Atlanta’s Groundfloor Finance Inc. have poured in, too. That company gathers up capital from thousands of small investors and is loaning about $12 million a month, primarily to real estate investors, said co-founder Brian Dally.