Home Flipping Profits Hit Record As Wall Street Drives Speculation (Again)

Back in March, we were thrilled to discover that becoming a real estate speculator is easier than we thought. Although bank financing may have dried up post-crisis, it turns out BlackStone (BLK) and a whole host of other PE firms will gladly loan credit-worthy borrowers money to accumulate distressed single-family properties. These newly-minted “investor-landlords” will likely have no trouble locating renters thanks to the fact that many former homeowners lost their residences in foreclosure during the crisis, and have found little economic respite in the anemic US ‘recovery.’ The PE firms who make this all possible are themselves driven by a desire to securitize the loans they make, meaning that in relatively short order, we should begin to see landlord loan-backed paper in the ABS market. 

Today, we get what is essentially the same story, involving the exact same PE firms (BlackStone, Colony (CBAN), and Cerberus) but with the wrinkle that instead of lending money to prospective landlords, the borrowers are house flippers. Here’s Bloomberg:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.

Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs — traditionally the highest in residential lending — are tumbling as the firms compete for customers.

The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors…

Of course PE firms, who have access to cheap capital, are passing the savings along to speculators (or, put simply, Fed policy is enabling this process)…

Since big investment firms have entered the industry, rates have already come down significantly and fees charged to borrowers, known as points, have decreased as well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based real estate firm that has been lending to house flippers for about 14 years.

“Rates historically were much higher, typically 15 percent with three to five points,” Lewis said. “In the last few months we’ve seen deals being done at 10 percent and two points.”