New York investors are moving away from traditional fix-and-flip loans and toward larger construction projects, according to Ruben Izgelov, CEO and Founder of We Lend, a private direct lender based in New York. The company, historically known for financing quick-turnaround fix-and-flip loans, now sees a growing share of its loan volume going to ground-up construction, condo conversions, and vertical or horizontal building extensions.
The shift reflects a fundamental change in the fix-and-flip model. Izgelov said that buying a property and spending $50,000 to $100,000 on cosmetic work no longer generates the returns it once did. “Our borrowers’ returns have been compressing,” he said. “The general fix and flip model doesn’t work as much as it used to, so investors have had to get creative, and that requires heavier, more substantial construction and rehab work.”
Construction budgets on deals through We Lend have grown from the $100,000 to $200,000 range into the $1 million to $2 million range, and in some cases the construction budget now exceeds the purchase price of the property itself. Managing the increased risk requires a different approach. We Lend requires an architect’s letter confirming the work can proceed as of right, without rezoning or variance applications, and on larger jobs, general contractors must sign completion guarantees. “We want GCs committed to the project just as much as the borrower is, without having to personally guarantee the loan,” Izgelov said. “They’re guaranteeing that the project gets completed.”
Two recent deals illustrate the range. In one, a borrower bought an eight-unit bank-owned property and converted it into 16 fully leased units with We Lend’s financing. The borrower is now discussing a refinance with several banks. In another deal in an affluent New Jersey suburb, a borrower was 85 percent finished building a 22,000-square-foot spec home when a lot line sale required paying off an existing private loan. We Lend restructured and refinanced the loan, providing the payoff and additional funds to complete construction.
Izgelov warned that the biggest miscalculation from investors moving into larger projects is timeline. A typical fix-and-flip loan runs six to eight months, but ground-up construction or major conversions often take much longer. “Budget carefully for the interest that has to be paid over that term,” he said. “Built-in extension options with your lender help, or better yet, start with a term longer than 12 months. We offer 18-month terms, and we’ve done at least one loan at 24 months.” He also cautioned against building to a trend rather than demand. “If there’s demand for a project of that size or caliber, great. But don’t build a mega mansion in a neighborhood that can’t support it just because that’s the trend.”
More information on how We Lend structures its loans is available on the company’s How It Works page.
