Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.
Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs -- traditionally the highest in residential lending -- are tumbling as the firms compete for customers.
The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors. Big firms with deep pockets and access to cheap capital may have an edge over local private lenders that have dominated flipper financing.
“It’s one of the few highly fragmented businesses left,” said Beth O’Brien, chief executive officer of Colony’s lending business, which started offering the loans last May. “If someone can do it nationally at scale, it’s cheaper and better for the borrower.”
Bridge loans, also known as hard-money or asset-based loans, give flippers cash for home purchases and construction with about a year to repay, and are backed by the real estate. They represent an opportunity of about $30 billion in origination annually, according to LendingHome, an online mortgage marketplace that makes short-term loans and sells them to investment firms such as Colony.
Blackstone, the world’s biggest alternative-asset manager, is seeking to make $1 billion of the loans a year, according to Nick Gould, executive chairman of the firm’s B2R Finance unit. B2R, started in 2013 to lend to landlords, earlier this year acquired Dwell Finance, which provides “fix and flip” funding.
Home flippers are benefiting from rising prices, limited new construction and a shortage of inventory on the market. While quick resales have decreased from the start of the housing market’s rebound, when investors snapped up discounted distressed homes, profits are getting bigger.
The average gross profit for completed flips in the first quarter was $72,450, up from $61,684 a year earlier and the highest in records dating to 2011, according to a report Thursday from RealtyTrac, a real estate data firm. Markets with the highest average gross return on investment included Baltimore, central Florida and Detroit.
Fix-and-flip investors have generally gotten funding from local private lenders as banks have shown reluctance to extend credit for speculative real estate deals. Borrowers are forced to pay high costs in exchange for the quick cash.