Value-add real estate gets another look amid housing crisis

One platform has closed on $450 million in a matter of months

Value-add real estate gets another look amid housing crisis

The housing crisis, marked by low inventory, soaring property costs and high mortgage rates, has been well chronicled. Yet one wouldn’t even think a crisis existed judging by the brisk pace of the value-add real estate segment.

Just ask those running Sherma Bridge, a private money lender in the single-family residential space. Ever since its recent partnership with New Western, described as the nation’s largest private real estate investment marketplace, things have taken off even more.

By virtue of the alliance, Sherman Bridge has closed on some 2,100 loans with a collective volume of $450 million across 48 markets since the partnership was forged some 18 months ago. “We have a unique platform that is really one of a kind right now,” Kurt Carlton (pictured), co-founder and president of New Western, told Mortgage Professional America during a recent interview.

An old concept gets a second look

The concept is nothing new but has taken on heightened significance amid a challenging housing market. “There’s this market for these value-add homes that has been misunderstood since we started this business 15 years ago,” Carlton said. “There are 200,000 investors on the platform today, and we trade a house every 13 minutes. They’re all these value-add houses – something that investors can create equity by rehabbing or something like that.”

The partnership took it over the top, he added: “With this lending marketplace that we added to it, we just nailed it,” he said. “We really hit it out of the park.”

To be sure, Carlton is thriving despite a housing crisis backdrop. But then again, he’s no stranger to challenge having founded his company in the throes of the Great Recession. Yet the more times change, the more they stay the same it would seem.

“So when we started the company in 2008, there was no money,” Carlton said. “Everybody had to purchase cash and we started a finance company as a result. We wanted these investors to be able to buy three houses from us and not just one. We did that for a long time but the whole market’s changed. Thers’s so much money in this space.”

The growing number of lenders for loans of this nature serves as another barometer the partnership would pay off. “There are so many lenders and small lenders that have popped up. There’s very little regulation because these are technically commercial loans, even though they’re on homes.”

The platform is tailored to the needs of investors, he added. “Sometimes they get with the wrong lender. These lenders are small and sometimes run out of money at the last minute. So we thought, man, we’ve got to simplify this for investors. So we built the platform on top of our marketplace. So we’ve got 15 of the most reliable, best lenders out there in this space.”

The goal was to be something of a one-stop shopping center for investors, he suggested: “We’ve got their information, we’ve got investors’ information, we have an underwriting engine with all the lender products. We know they’re reliable because we’ve done a ton of business over the years. It just made the whole thing really easy – at the click of a button they can get the process started.”

Of ADUs and side hustles

The growing “side hustle mentality has helped spur further growth,” Carlton said. “We always say the great resignation meet the great renovation,” he joked. “There are a lot of people sliding into our space in this side hustle world. A lot of people in Seattle and California – markets like that where they’re just very expensive – they get into this space by putting an ADU [accessory dwelling unit] in their backyard. That’s becoming more and more popular and then they realize ‘I can access some rental income. I just built this property in my backyard’ and they’re on to the next one. They’re starting to become real estate investors by exploring this method.”

He cited the Federal Housing Administration as a bellwether signaling the growing acceptance of this real estate method. “They consider it income to qualify for a mortgage,” he said of ADUs. “They’re getting more and more serious about this as they’re taking the inventory crisis more seriously. They are using some of that as a means to access a home that would otherwise be unaffordable.”

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