Due diligence is top priority in private lending

More investors consider private lending options as home flipping in the U.S. continues to be popular—and profitable

Due diligence is top priority in private lending

When it comes to commercial lending, there’s this idea floating around that private money is a quick and easy, equity-based deal, but that’s not necessarily the case.

John Dimino, business development manager at Temple View Capital says even with private money, there needs to be a level of due diligence in every deal, which includes background checks, fraud checks and a decent appraisal.

“A lot of commercial loan officers think private money deals should be based on equity alone, but if you take the time to ensure these files are strong and the deals are safe, the borrower gets a great deal and the broker gets paid really well.”

Both new and career investors are getting in on the fix-and-flip properties. It’s a trend that’s been going strong in 2019, and Dimino expects that to continue through the new year. In fact, home flip lending volume was up 31% in the second quarter of this year, compared to 2018, with $8.4 billion, according to the U.S. Home Flipping Report by ATTOM Data Solutions. That’s the highest level in 13 years. Also, more homes were flipped in 70% of locales analyzed, compared to this time last year.

But Dimino warns we are in a happy bubble right now in the commercial real estate industry, and that it’s bound to burst.

“As long as investors can keep afloat, it’s going to be great for the commercial fix-and-flippers. Properties are going to be coming out on the market in foreclosure and in default, and those are prime properties to pick up.” He doesn’t know when the bust will happen, but he said it’s silly to think that it won’t. “Things are too good right now; the percentage of appreciation in a lot of markets is way too robust and it’s not sustainable. There’s got to be a correction.”

While home flipping rates are up, the U.S. Home Flipping Report also found the return on investment is actually down. Homes flipped in the second quarter of 2019 typically generated a profit of $62,700, which is up 2% from the previous quarter, but down 2% from 2018.

“Home flipping keeps getting less and less profitable, which is another marker that the post-recession housing boom is softening or may be coming to an end,” Todd Teta, chief product officer at ATTOM Data Solutions, said in a statement. However, according to Teta, flipping houses is still a very good business to be in and profits continue to be healthy in most parts of the country – it’s just not comparable to a few years ago.   

Temple View Capital has some unique offerings compared to other private lenders in the commercial real estate space, according to Dimino. The private lending company created some new products to help lower closing costs by fronting the rehab budgets, which can sometimes be in the hundreds of thousands. That way, Dimino said, the investors don’t have to pay for labor and materials out of pocket and can instead keep those dollars leveraged in other projects.

“We can also wrap the entire term of payments, typically 9-12 months, into the loan. So, the borrower will never have to worry about a payment during the course of the loan, and can focus on the renovations,” he said.

Dimino admits the commercial lending space isn’t the easiest industry to be in but says it’s very rewarding. For newbies especially, it can be particularly challenging. “It’s a lot of fun, but you have to love what you’re doing. If you can, surround yourself with people who already have a book of business because there’s a lot of competition.”