November 11, 2021
By Paul Muolo

In the wake of the fix-and-flip business blowing a hole in Zillow’s balance sheet in the third quarter, now might be the time for some non-agency lenders to think more critically about their role in the sector and maybe even cut back a bit.

But so far that hasn’t happened — with most of those interviewed noting that Zillow got burned because it miscalculated as an investor, not a funder.

And if you thought the news of Zillow’s $304 million write-down of its flipping inventory might deter new lending entrants, think again.

Non-qualified mortgage originator Acra Lending, Irvine, CA, confirmed to Inside Mortgage Finance this week that it’s rolling out a new business-purpose loan — in other words, fix-and-flip loans — with a select group of loan brokers.

Its goal for 2022? To originate anywhere from $500 million to $750 million worth of these short-term loans.

Acra Executive Chair and President Keith Lind said he’s aware of the Zillow story, which resulted in 25% of Zillow’s full-time staff losing their jobs. “Zillow is an incredibly technical company,” he said, noting that the publicly traded real estate firm couldn’t exercise its flips fast enough because of problems finding reliable contractors.

Trusting the Little Guy

Lind said Acra is not worried in the least about the fix-and-flip market and plans to be careful about who the nonbank extends credit to. He quipped, “We’d never lend to a guy who just bought his first pickup truck and a new toolbox.”

The company’s target audience? Mom-and-pop stores and companies with a proven track record in the fix-and-flip arena. Corporates? No.

Another executive who remains bullish on the space is industry veteran Bill Dallas, president of Finance of America. By the time 2021 ends, Dallas expects FoA to have racked up at least $2 billion in fix-and-flip production and maybe a bit more.

His view on Zillow? “They’re indicative of quick-buck operators in the single-family rental space.”

Dallas warned that although he feels good about how his company underwrites and handles the credits, the easy money (courtesy of rapid home price appreciation) is over. He added, “I feel much safer lending to mom-and-pop [contractors].”

According to figures compiled by this newsletter from our Home Mortgage Disclosure Act database, FoA ranked fifth last year in short-term originations, a product type that is representative of fix-and-flips. Its volume last year: $407 million.

The four lenders in front of it: Lending Home with $1.54 billion of originations, Anchor Loans ($970.5 million), Civic Financial ($771.3 million) and Goldman Sachs ($652.9 million).

Depending on the collateral and the track record of the borrower, the interest rates on fix-and-flip mortgages can vary from a low of 4% (for the very best and experienced flippers) to as high as 9%.

But not all of those interviewed are wearing rose-colored glasses. California loan broker Michael Foote, a mortgage professional of several decades, said the business looks “pretty risky” right now.

His take: “If you acquire the property at a premium, the repairs and the materials for the fix are being paid at a premium, so the flippee is currently getting screwed and will be dumping their house after values drop 30% …. It’s an interesting game of hot potato where a lot of money gets made but when the music stops there won’t be any chairs left.”

Source: Inside Mortgage Finance Publications, Inc. Copyright © 2021 Used with permission.