Most Fix & Flip Lenders are Increasing Rates, But Not ZINC
Here’s what you need to know to navigate your financing options in an evolving market.
In the past year, short-term US Treasury rates have risen nearly three full percentage points and now short-term fix & flip lenders are responding by passing those increased costs on to borrowers or closing their doors. Thankfully, not all fix & flip lenders operate the same. Some are better positioned to keep rates lower for their borrowers than others. Understanding these differences can help save you or your clients a lot of money.
It’s key to understand from where your fix & flip originator receives their funds. There are four general categories of funding sources and most lenders use one or a combination of these.
Wall Street
Hedge funds and insurance companies have had a healthy appetite for the high yields offered by fix & flip loans. Companies such as Toorak and Peer Street either table fund loans brought to them by originators or purchase the loans from originators within a few weeks after the loan closes. As a borrower, unless you ask, you would not know that one of these companies is behind the funding of your loan. These companies rely on the bond market, and that market has become extremely volatile in the past 6 months. Lenders that rely on Wall Street for their funding are struggling right now, and have no choice but to pass along higher costs to borrowers.
Bank Capital
Some fix & flip lenders borrow capital from banks where rates tend to follow the Federal Reserve. The cost of bank capital has risen, but not nearly as high as Wall Street. Banks borrow most of their money from the American public through savings accounts, CDs, and money market accounts where rates are considerably less and have risen very little. Lenders with bank capital have not been impacted as much as lenders who rely on Wall Street and as result, rate increases are not as drastic.
Private Investors
Many lenders borrow from private investors at one rate and lend it out at a higher rate. These private investors tend to be a little more demanding with the rates they’re willing to accept, therefore these lenders may be getting some pressure from their private investors to raise rates. If you see rate increases from these lenders, it may just be them being opportunistic. Push back a little. They may keep their rates the same or be willing to negotiate.
High Net Worth Individuals
Lenders using high net worth individuals, also known as ‘accredited investors’, are lending their own money and tend to be smaller with annual loan volume <$100MM. They set their own interest rates and terms. As with lenders using private investors, lenders funded by accredited investors may be getting pressured by their investors to raise their rates and may do so to avoid turning to Wall Street. Building a relationship with these lenders can help you keep your rates the same in a rising rate environment. When considering lenders in this category, it's important to consider that they may be smaller and may run out of capital. So, develop these relationships but keep other options available in case they’re out of money.
As mentioned, many lenders use a combination of these sources. They may use accredited investors with some bank capital. They may have a pool of private investors and sell all of their loans to Wall Street. Call your lender and ask them how they’re funded. It’s not rude – it’s due diligence.
The real estate market is softening and the capital markets are in a state of disarray. It’s time to touch base with your lender and see if their loan program has changed too.
ZINC Financial is America's premier private lender, currently offering 7.49% fix & flip interest rates, 100% rehab costs, as little as 10% down, and closes in as fast as 7-10 days. We have plenty of capital to lend and are funded with a combination of our own funds through ZINC Income Fund, our own Real Estate Investment Trust (REIT), private investors, and bank capital. To learn more about our fix & flip loan programs call us at (559) 326-2509 or apply online to get started.
