PRIVATE LENDING
FLIP? OR FLOP?
Uncertainty In Home Values Could Tighten Lending Market BY CHUCK GREEN | NATIONAL MORTGAGE PROFESSIONAL CONTRIBUTING WRITER
W
ith nerves already frayed by COVID-19, some financial backers are fretting over the prospect of doling out cash to private lenders considering financing the purchase of a foreclosed or distressed property. After all, how does anyone know whether it’s really a “good buy?” Plus, profit margins as a percentage are at their lowest in almost nine years. That’s never been an especially easy question. Loan originators have always been unable to forecast what a future sale might look like with complete certainty; there’s always going to be some inherent degree of risk, said Than Merrill, CEO and founder of real estate education company FortuneBuilders, and founder of CT Homes. That said, today’s most prolific lenders aren’t those who can “realistically” forecast. Instead, they can mitigate risk by working with tools already at their disposal; namely, comparables.
42
PARADIGM IN QUESTION
Frank Gallinelli
Frank Gallinelli, founder and president of RealData Software & Education for Real Estate Investors, said his first inclination is that in this new abnormal, one would be hard-pressed to have a basis for a realistic forecast of value. However, while one would normally want to take a long view of market data to make a credible forecast, investors and lenders might want to refocus on data’s short tail.
| NATIONAL MORTGAGE PROFESSIONAL MAGAZINE
Up until March, he added, young -- and often not-so-young – professionals, preferred to be where the action was. That entire paradigm is now called into question, with implications for markets that are in reach of, but not within, big cities. Investors and lenders would need to tap into a more immediate heartbeat in order to recognize if this may becoming, to coin a phrase, ‘the new normal’. Then there’s this research from ATTOM Data Solutions, a property data provider. In the first quarter of 2020, the gross profit on the typical home flip nationwide (the difference between the median sales price and the median paid by investors) did increase to $62,300: a step up of $300 from the previous quarter and up $1,625 year-over-year. But with home prices rising, the typical gross flipping profit of $62,300 translated into only a 36.7% return on investment compared to the original acquisition price, down
