I remember when house flipping was all the rage among younger investors looking for something other than stocks and bonds. At its peak, house flipping was one of the most attractive investments around. These days, not so much. But people still do it. And oftentimes, they turn to hard money lenders to fund their operations.
This isn’t necessarily a problem until a new house flipper discovers he can’t find a hard money lender to work with. He searches high and low to no avail. Every local lender he contacts says no to house flips. What’s the deal? Why do some hard money lenders refuse to loan for flipping projects?
Lending Is an Investment
One of the things that makes hard money different is how it is perceived by the actual people who provide the funding. Hard money firms, like Salt Lake City’s Actium Partners, are funded by individual investors who pool their money to lend out.
Due to this arrangement, hard money lending is viewed more as an investment than a banking service. As such, it is subject to the reality that investors are choosy about what they put their money into. Some hard money firms simply don’t do house flips because the investors that fund those firms do not want to put their money into what they consider a risky venture.
They Have Valid Concerns
Hard money lenders choosing to stay away from house flips have valid concerns. House flipping is inherently risky for the simple fact that home values fluctuate too easily. Not only that, but buyer tastes also change and evolve over time. Professional flippers are taking the risk that they can turn over an acquired property quickly and at a price high enough to cover costs and make a profit.
To some hard money lenders, this is too risky. The risk is high even before you throw in repair and renovation costs. Those costs can eat into profits if an investor underestimates them early on.
You Have to Know Your Stuff
As a house flipper, you really need to know your stuff before you buy a new property. You need to have a firm handle on current property values and where they are headed. You must be able to accurately assess the repairs and renovations a property will require in order to get it on the market. And finally, you need to understand the buyer’s mind.
Residential property values are determined almost exclusively by supply and demand. A home is only worth as much as prospective buyers are willing to pay for it. So if a house flipper doesn’t understand the local mindset, he could end up putting a ton of money into upgrades prospective buyers don’t want. That could lead to difficulty selling the property or getting the right price for it.
Some Lenders Aren’t Bothered
The flip side of all of this is that some hard money lenders aren’t bothered by the inherent risks that come with house flipping. They fully understand the risks and are willing to accept them in exchange for the payout. Actium Partners isn’t one of those firms, but there are plenty of others out there.
Where Actium prefers to focus on commercial real estate investments, there are other hard money lenders who have gone all-in on house flipping. House flipping is their bread and butter; flippers are their preferred customers.
Now you know why not all hard money lenders are willing to do house flips. It is an individual risk aversion thing. Some firms think flipping is too risky while others don’t. It is as simple as that.