Fix and Flip

Ensuring Lender Protection

• by Brenda Gordon, Ren Hayhurst
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A Vital Priority Amidst Booming Demand and Fast-Paced Lending By Brenda Gordon & Ren Hayhurst As the commercial lending landscape experiences significant shifts in 2023, multi-family lending appears to be slowing down, while the demand for single-family rental (SFR) units remains resilient. Amidst this dynamic market, lenders have strategically expanded their loan portfolios to capitalize on the surging demand. However, the real opportunity lies in the fix and flip loans, presenting an exciting opportunity for lenders to branch out and venture into multiple properties with portfolio loans. Recent statistics further validate the potential of fix and flip lending, with 72,960 single-family homes and condominiums flipped in the first quarter of 2023, accounting for 9% of all sales. While these numbers experienced a slight dip from Q1 2022, when they represented 9.4% of total home sales, they remained higher than the 8% recorded in Q4 of the previous year, reaching the second-highest figures in the last 23 years. According to GoDocs lending data, the fix and flip market is becoming increasingly relevant and promising. Throughout 2022, fix and flip loans delivered an astounding performance, witnessing a staggering 325% growth in Q3 compared to the previous quarter. This momentum continued into Q4, with a solid 50% expansion. Year over year, these loans witnessed an impressive surge of 280% from 2021 to 2022. Amidst this surging demand and fast-paced lending, safeguarding interests and ensuring the overall stability of fix and flip real estate investments have become paramount for lenders. So, what risk mitigation strategies should lenders adopt to navigate this dynamic market with confidence? Let’s delve into some crucial considerations that can empower lenders to thrive in the fix and flip domain. The Demand: Faster, More Complex, More Flexible As the fix and flip market experiences rapid growth, private lenders face new challenges that demand advanced solutions beyond traditional contractual and operational approaches. To effectively mitigate risks and stay ahead of the competition, lenders must adopt new strategies that cater to the evolving demands of this dynamic market. Speed The current market reflects strong demand for fast-closing, short-term interest-only loans with fixed rates. The market for acquiring SFRs is moving so quickly that lenders cannot afford any delays in the closing process, including document organization. Quick turnarounds are crucial to meeting borrower demands and securing lucrative deals. The Ability to Navigate Increased Complexity Multi-property portfolio fix and flip loans are becoming more common, necessitating sophisticated loan doc packages. Lenders must handle multiple security instruments across different jurisdictions, partial release provisions, loan re-balancing, and comprehensive loan-to-value ratio and debt service coverage ratio tests. Flexibility Construction funds often require careful management to ensure timely and on-budget project completion without incurring mechanics’ liens. Whether funds are held in the loan for progress payment disbursements or placed into an escrow account, lenders need a seamless system that safeguards their investments. If the funds are disbursed into an account held by or under the control of the lender, this option requires a separate account security agreement that works in tandem with the construction disbursement provisions in the other loan documents. The ability to manage construction funds efficiently and securely is paramount to protecting the lender’s interests and maintaining a smooth loan process. 50-State Compliance As top-tier markets narrow, the expansion into new markets has been initiated by fix and flippers, necessitating private lenders to possess bulletproof documentation that remains effective in any state, ensuring 50-state compliance to adapt to diverse regional requirements. The automated, real-time 50-state compliance method empowers lenders to have projects funded in new jurisdictions within minutes, enhancing speed and flexibility. This streamlined approach not only accelerates the lending process but also mitigates any concerns surrounding the complexity of adapting to diverse regional requirements, ensuring bulletproof documentation remains effective in every state. Documentation Automation: Pioneering the Future of Fix and Flip Lending In this rapidly changing financing landscape, cutting-edge technologies, as GoDocs offers, empower commercial lenders to pivot into new geographical areas and embrace various loan types, including the financing of ground-up build-to-rent (BTR) construction and fix and flip rehabilitation projects, without delay or complication. The advantages extend beyond just speed; automation reduces costs, delivers faster turnaround times for borrowers, and enables lenders to distinguish themselves from competitors. The fast-paced nature of the market and the rapid advancement of technology are well-grasped by industry experts. Like being a slow-moving tanker in a sea of change when clinging to outdated tools and methods, it becomes imperative for these experts to stay steps ahead, anticipating market shifts, and swiftly identifying emerging needs. Rapidly developing cutting-edge solutions empowers lenders to navigate the ever-changing landscape with ease and confidence. As the market evolves, our solutions stay responsive, anticipating lenders’ needs as the economy changes. We understand the importance of staying ahead of what is coming and what is needed in the industry. Examples of our commitment include building out the ability to generate unique loan packages for ground-up BTR construction loans and fix and flip rehab loans, as well as providing for automated loan modification documents to accommodate the growing need for term loan modifications or short-term extensions for fix and flip loans. Flexibility and configurability have become crucial cornerstones of modern automation technology, transforming how lenders approach complex fix and flip loans. Advanced automation solutions now offer effortless customization, ensuring seamless adaptation to various project agreements assigned to lenders. These innovative platforms also provide tailor-made completion guaranties and project assignment agreements specifically designed for fix and flip construction loans. Technology’s answer to flexibility: Rather than a “one-size fits all” construction loan package, advanced automated technology offers a custom fix and flip construction loan package. Taking advantage of cutting-edge automation packages equips lenders with streamlined documents, efficiently managing essential aspects such as construction completion obligations, disbursement controls, lien protections, loan balancing provisions, and rights of inspection. Additionally, lenders can access a range of construction loan doc packages, each meticulously crafted to address specific needs, whether it is ground-up construction, major rehabilitation projects, or simple cosmetic property improvements. As the