Take a chance on commercial lending
Regardless of the reason, there simply aren’t enough properties on the market for the number of people—borrower and investors alike—who want to purchase them.
Single family homes in particular are in demand, and even though unemployment and interest rates are at record lows, single family building permits are much lower than they need to be to satisfy borrowers.
At the California Mortgage Expo, Jeffrey Tesch, managing director at RCN Capital, said that the turnover of homes on the market also isn’t as frequent as it used to be.
“Folks are just simply staying in their houses longer,” he said. “Whether it’s job security, [they’re] feeling good, maybe not wanting to make the mistakes that were made in the run-up to the financial crash, any number of reasons, but the reality is, houses aren’t turning as quickly as they used to.”
For a number of reasons, then, there is an opening for mortgage originators in the non-owner occupied investment space. From 2006 to 2017, 5.4 million single family homes transitioned from owner-occupied properties to rental properties, Tesch said. In the last quarter of 2018, 10 percent of the homes sold were flips, and 38 percent of those were purchased with financing.
That represents a lot of transactions where people are looking for mortgages to buy these flips and/or rentals.
Commercial lending can be a big leap from the world of residential mortgage lending.
“We are talking about commercial loans, which kind of sounds scary to the traditional mortgage originator,” Tesch said. People think of commercial lending, they think warehouses and retail space, but that’s not always what commercial lending entails. “What we’re talking about is commercial loans for residential investment properties. It’s very, very different, but very, very similar to what [originators] do today.”
Part of the reluctance to get into the investment space may also stem from an idea of the stereotypical investor, a shadowy, suited figure with no ties to an individual community. But there are several categories of investors: the “the accidental investor”, who maybe experienced a job relocation or received an inherited property and kept their initial home; the people who bought one or two properties as a way to have extra retirement income; and of course, the mega companies that own thousands of properties.
There are products available for straight acquisition, there are products available for acquisition and rehab, and there are products available for refinance; there are also products that better suit a fix and flip than they do buy to rent properties, and vice versa. Probably the biggest difference from an origination standpoint comes from qualifying buyers. On the fix and flip side of things, underwriters are looking at whether or not a borrower is going to make money on the transaction as opposed to their credit and payment history. A longer-term rental property, however, would look at payment history, which is more similar to traditional residential lending.
Tesch suggests starting with local real estate investment groups, or REINs. They’re a great source of local knowledge and an easily-accessible way for mortgage originators to get a sense of what’s happening in their individual market. With that local knowledge put to work, it’s much easier to expand and scale to other markets.
With more funding options available, mortgage originators can stop turning away deals that they don’t know how to handle. Being able to close short-term deals also means that buyers are getting into—and out of—properties faster, and coming back to the originator for another loan.
“This is what makes this product so attractive to the mortgage professional. Once you lock in that customer and you service them, you could really get on a treadmill with them,” Tesch said.