How does the financial market drama impact the fix & flip industry?
You are the professionals at adding value and fix and flipping, and we look to you to understand what’s going on in that world. We work together with you to create more opportunities. So if we want to know what’s going on with concrete costs or permitting holdups or whatever, we call you, and in the same way, we’re the ‘money guys’ so we thought we’d let you know what’s going on in our world. We know lots of people who do what we do, and we have respect for a good chunk of them, so we will discuss the industry, rather than our specific situation. Of course, if you want to chat over our particular situation just give me a ring or we can grab a taco – I’m always up for that.
The finance world has been interesting. The first impact that probably comes to mind is the the Silicon Valley Bank and Signature Bank failures. These affect our world only indirectly. On the downside, spreads (the rate paid over the reference rate, which is usually SOFR) are likely to creep a bit wider, to accommodate an increase in the banks’ cost of funds and as they try to make up a bit of lost ground. The upside is that the reference rate is likely to come down a bit, and indeed the 2 year is lower by nearly 1% over the last month. The net effect of the wider spreads and lower rates should be that the net rates should be the same for a while.
Digging deeper into the weeds but staying with the banks is CSFB, which is a large player in the world of structured finance. Structured finance, in our world, refers to bundling groups of loans and selling them to buyers who wouldn’t otherwise be interested. Why would someone want a bunch of something they don’t want singles of? Because a pool of assets can allow for some part of those assets to have issues and the pool still be ok. And you can create payout priorities so people that want less risk can stand at the front of the priority queue, for which they will accept less return, and allow others who want more risk (and return) to stand subordinate in the payment queue. Why does this matter? Since the Fed started raising rates, and then CSFB having issues, the structured market has done very little for the past 6-9 months. Many hard money lenders use this method to offload loans they make. If you’ve been at this a while and you have ever wondered why the person who services your loan isn’t the one who made your loan, the answer is likely that your loan was sold into one of these pools. This has made hard money loans a bit tougher to come by.
And then, as you know, volumes have been lower. With tighter spreads and no one buying loans on the backside, there has been a contraction in the marketplace. Interestingly, it has hit the big guys and the small guys the hardest. The ‘big guys’ because they were dependent on the structured financing to keep their machines going. And the smaller guys that were actually brokers and acted as sellers to those big guys (they may have called themselves ‘lenders’). New sources and models are being developed to address the opportunity.
Let me just make sure to reiterate this discusses the markets as a whole and no particular situation, ours or someone else’s. We have a lot of respect for many of our competitors, even though their methods or models differ from ours. Yes, there are some bad apples too, but there are many talented lenders and ‘money people’ out there, who understand and serve the industry well, and we are (generally) happy to be in their midst.
What is the impact of all this? Not much at present in the short term, and moderate in the longer term. So why spend all this time discussing and covering the financial market drama when we could be discussing supply chain issues or challenges in acquiring foreclosure properties? Because there will be a lot of pressure over the next bit to worry about these things. Hopefully, this has helped you consider the impact and determined it as interesting, but no factor, and you can get back to doing what you do best: adding value.
