Falling Rates

Since big investment firms have entered the industry, rates have already come down significantly and fees charged to borrowers, known as points, have decreased as well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based real estate firm that has been lending to house flippers for about 14 years.

“Rates historically were much higher, typically 15 percent with three to five points,” Lewis said. “In the last few months we’ve seen deals being done at 10 percent and two points.”

The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.

“These are ideal clients, with the potential to be repeat borrowers across a number of product lines,” said Randy Reiff, chief executive officer of Cerberus’s FirstKey Lending.

Resource Intensive

FirstKey started offering fix-and-flip loans about six months ago and is just beginning to expand the business. Interest rates generally range from 9 percent to 12 percent for 12-month terms. Borrowers often sell their homes and repay loans earlier, said Reiff, which means it takes a lot of effort to rapidly expand the business.

“It’s resource intensive, and it’s important to have an adequate infrastructure,” he said. “If the regional guys do $50 million of product a year, they could be a major player in their markets. For the larger institutions, that barely moves the needle.”

The hard-money market is getting crowded, which may lead companies to loosen their standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired by credit investor Garrison Investment Group about six months ago. His business has more than 300 approved borrowers with credit lines.

“Everybody just jumped in,” said Filler. “The risk is people start to relax underwriting guidelines to chase loans. As this becomes more competitive, there will be more pressure to do that.”