Pivoting From Risk: Why Some Hard Money Lenders Avoid Fix-and-Flip

There are some housing markets in which residential fix-and-flip still works well as an investment strategy. The silicon slopes and historic avenues of Salt Lake City are two such markets. Meanwhile, there are plenty of hard money lenders just waiting for opportunities to work with investors. So why do some of them avoid fix-and-flip?

Salt Lake City-based Actium Lending is one of those lenders. Even as one of the most respected Utah hard money firms, they have a hard boundary when it comes to residential fix-and-flip. This can seem counterintuitive to an investor who has been conditioned to believe that property flipping is the heart and soul a private lending.

While many private lenders have built very strong businesses around fix-and-flip, others purposely avoid getting involved with this type of commercial real estate investment. Understanding why requires looking into the risks and specialized nature of commercial versus residential debt.

Retail Markets Are Volatile

The foundation of a decision to avoid fix-and-flip rests in the fact that residential homes are considered retail properties even though investors buy, rehab, and sell them as a business. It is also important to remember that retail markets are highly volatile.

Making money on a fix-and-flip project relies on a consumer purchasing the finished home. Yet everything from seasons to school districts and interest rates highly influences consumer trends.

By contrast, the commercial real estate Actium Lending focuses on is driven by income and logic. Take a bridge loan intended to help an investor purchase a Provo office building. That building already has tenants. It is already generating income. There is significantly less volatility to consider because the investor is not hoping someone will come along and buy the property.

The Need for Micro Management

Fix-and-flip projects are labor-intensive by their nature. For the lender, this means getting involved as a micromanager. Lenders need to stay on top of things to make sure that investors are on schedule. They need to know the details of each project in order to manage cash draws. Focusing on commercial real estate eliminates the need to micromanage borrowers.

Hard money loans for acquiring commercial real estate are typically single-issue loans. The borrower gets all the money upfront. As for the lender, it sits back and collects monthly payments until the buyer is ready to exit.

Property Condition Risks

The biggest risk with fix-and-flip properties is property condition. A residential property can look good at initial purchase, only to turn into a money trap once renovations begin. As such, it’s fairly easy for investors to lose money. This puts hard-money lenders at risk. Only a lender with a real appetite for fix-and-flip is willing to carry such a high amount of risk. Most simply won’t do it.

Earning Potential and Scalability

To the naked eye, fix-and-flip would seem lucrative to hard-money lenders whose interest rates and points tend to be significantly higher than conventional lenders. But earning potential is tied to the size of the loan. Think of it this way: a fix-and-flip borrower may only need a few hundred thousand dollars at a time. But an investor dealing in commercial real estate can borrow millions.

Commercial real estate represents value at scale. Hard money lenders enjoy a higher earning potential by lending more. For some of them, there just is not enough money in residential fix-and-flip to make lending worthwhile.

Although Actium Lending is among those Utah hard money lenders that avoid fix-and-flip, there are other firms willing to fund the fix-and-flip strategy. So if that’s your thing, there are lenders out there.