Investors control 30% of all transactions – here’s how brokers can cash in
Despite reports that there are thousands more sellers than buyers in the housing market, the reality is that there still is a housing shortage in America.
Combine the fact that there aren’t enough houses being built to keep up with demand with a possible ban on large institutional investors, and an opportunity emerges for mortgage brokers and smaller builders.
While institutional investors' deals might escape the conventional broker space, small and mid-sized builders need funding for ground-up construction and residential transition loans (RTL), or fix-and-flip projects. One mortgage executive sees this as a golden opportunity for brokers to get more deals.
Tom Davis (pictured top), chief sales officer at Deephaven Mortgage, said the housing shortage isn’t going away anytime soon, so there will be plenty of opportunity for brokers to work with builders and investors to help close the housing gap.
“The reality is we have a housing supply-demand imbalance,” Davis told Mortgage Professional America. “That's going to be around probably for the next 10 or so years, from what I'm seeing. So it allows originators to be a part of a solution to help bring inventory into the market, whether new or existing.”
Changes in construction financing
The world of fix-and-flip and ground-up construction financing has changed considerably with the growth of the non-QM space. Before that, brokers would be relying on some banks and hard money lenders for more complicated deals.
“The way homebuilder finance has been done over the last three years has really changed,” Davis said. “The top 20 mega builders in the United States get straight financing. But with regional and local builders, the capital is not as reliable. Certain banks have backed off of those products. If you go back five to 10 years, the ground-up construction financing was really like the hard money stuff. The fix-and-flip was hard money.
“Now the institutional money has come in and provided better terms. The investors like the yield on the product, so it's becoming more institutionalized.”
Davis said that because a growing percentage of all mortgage loans are done by investor clients, having access to these construction products allows a broker to get multiple loans for the same project.
“Last year, 30% of the transactions were investor transactions,” he said. “I think it's a must-have product because it allows you to further work upstream. Because if you can help the builder-developer build a home, then when it's time to do the takeout financing, you could actually do the end loan, and you can get two deals on one project.”
Not only can brokers close multiple loans on the same project, but because so many investors are constantly coming back for financing, you might be able to fill your pipeline with limited customer outreach.
“Unlike a consumer who might buy a house every five years, an average investor across the United States is doing five deals a year. If you don't have access to fix-and-flip and ground-up construction, then investors in the marketplace, the savvy, professional investors, they're not going to take you seriously.”
A hard deficit to make up
Davis noted that even if the large builders aren’t capped in how many homes they can build, even if they increase production, it still won’t be enough to close the gap on the housing shortage.
“Yeah, the biggest builder in the United States, I believe, is D.R. Horton,” he said. “They build 80,000 homes. We need to build an extra million homes a year over the next 10 years to fix the supply-demand imbalance. We’re short 5 million, but that's what we're behind. That doesn't include the regular population growth, the migration growth that we've had.
“So if D.R. Horton builds an extra 10% of homes a year, that's only 8,000 homes. I'm talking about a million. So the top 20, top 30 builders build 25% to 30% of the overall builds. Where there's opportunity is with regional and local builders who build 65% of the homes on an annual basis. They're the ones who need access to the capital.”
For brokers who are willing to commit to doing more investor loans, Davis thinks they could be unlocking a ton of deals while also helping reduce supply constraints in major markets. The trickle-down effect benefits existing home customers as well.
“Those investor products really allow you to serve both your newer investors and your most savvy and professional investors,” Davis said. “So having a full suite, including the RTL/fix-and-flip and bridge, is something that we're really seeing the top originators in the country embrace. Because almost a third of the market was investor transactions. If you don't have a full suite of investor solutions, you're at a competitive disadvantage.”
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