New York investors are moving away from traditional fix-and-flip strategies and toward larger construction projects as rising costs compress returns, 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 in New York, reports that a growing share of its loan volume now goes to ground-up construction, condo conversions, and vertical and horizontal building extensions.
“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,” Izgelov said. He noted that construction budgets on deals 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.
To manage the increased risk of larger projects, We Lend requires documentation that most lenders skip. Before financing a conversion or extension, the firm requires an architect’s letter confirming the work can proceed as of right, without rezoning or variance applications. On larger jobs, general contractors must sign completion guarantees, ensuring they are committed to finishing the project without personally guaranteeing the loan. “That keeps the playing field level between the borrower and the GC, especially when the borrower hasn’t worked at this scale before,” Izgelov said.
Two recent deals illustrate the range of projects We Lend now finances. In one, a borrower bought an eight-unit bank-owned property after the previous lender declined to finance improvements. We Lend financed the conversion of that building into 16 fully leased units, and the borrower is now in discussions with several banks about a refinance to return original equity for the next project. In another deal in an affluent New Jersey suburb, a borrower was about 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 a small cash infusion to complete construction.
Izgelov cautioned investors moving into larger projects to plan for longer timelines. A typical fix-and-flip loan runs six to eight months, but ground-up construction and 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 warned against building to a trend rather than demand, saying, “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.
