Hard money lenders flip over Washington real estate

South Carolina-based Lima One Capital hard money lender has entered the Greater Washington market as part of a 10-state expansion in the Eastern U.S.

The company is hoping to profit from the region’s robust housing market as real estate investors snap up properties, rehabilitate or expand the space, then resell or flip it to other investors or homeowners, often in less than a year.

Hard money lenders offer short-term capital at higher rates than banks and other highly regulated lenders, typically 14 percent to 18 percent, plus origination fees. Lending decisions are usually made in just a few days without the tedious underwriting hurdles of banks. That allows investors to buy properties for cash, often before they are posted in real estate listings.

Hard money lenders focus on the market value of properties after promised renovations and construction, rather than the purchase price or the borrower’s creditworthiness. They typically lend up to 65 percent of that anticipated resale value and do not lend to owner-occupiers. Loans are protected by a first mortgage on the property.

“We see a huge need for a professional company to provide loans for the purchase and rehabilitation of flipped products,” Lima One Capital President John Warren told me, acknowledging that hard money lenders have a bad reputation for being “unprofessional and undercapitalized.”

Warren projects his company will do about $33 million in loans in the District over the next two years, plus another $20 million in Northern Virginia and the Maryland suburbs in the same period. He said Lima One did $50 million in loans last year before expansion, a lot of it in Atlanta’s tony Buckhead section.

Warren founded Lima One Capital in 2010. He’s a former Marine who served a couple tours of duty in Iraq. He’s a recent profile. He said the firm has institution backers, which he declined to name, and “can do as many deals as they can possibly bring us.”

Before the housing bubble and recession of the last decade, investors could bank profit on quick appreciation and some fresh paint and new carpet. “Those days are over,” Warren said.

More recently, the investment action has focused on foreclosed, bank-owned properties. Buyers could grab houses at fire-sale prices and resell the title for handsome profits as the values began began rising off the mat.

Now, Warren said, profit is being made in doing major renovations and additions.

“My best customers are general contractors who decided they want to be entrepreneurs,” said Brian Athey, president of District-based Congressional Capital.

He said 80 percent of the flipping action in the District is condo conversions, typically four to six units, instead of the single-family homes that dominated the market a few years ago.

Nationwide, 3.7 percent of all U.S. single-family home sales were flips during the first quarter of 2014, according to RealtyTrac, an online data source. That is, the home was purchased and sold again within six months. The figure is down from 4.1 percent in the fourth quarter of 2013 and down from 6.5 percent in the first quarter of 2013.

In Greater Washington, single-family home flips dropped 73 percent in the first quarter compared to the same period last year. Such activity was off 81 percent in Baltimore.

Read the full story from the Washington Business Journal.
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