From the Trenches: What we learned from 08' to prepare for now with Merchants Mortgage
The days since March 23 have been interesting to say the least. But, I know that we at Merchants Mortgage learned a lot from the 2007-2008 recession that helped us be better prepared to weather this storm, or virus as it were, aside from not knowing that toilet paper and hand sanitizer would be like gold! The previous lessons that we learned, that are now helpful and helpful to any individual or business, were to keep our liquid reserves high for the downturns, operate leanly in terms of staff and expenses, don’t put all of your eggs in one basket and maintain strong relationships with a handful of good sources, whether it be lenders, insurance agents, title companies, etc. to rely on, and keep up with technology. We are seeing that many investors and businesses also learned these lessons from the past recession and are thankfully still operating in this new (hopefully short-lived) environment.
We are a Denver based fix-and-flip lender (in Denver since 1961). We are still actively lending on residential (1-4 unit) investor fix-and-flips in Denver, Phoenix, and Kansas City metro areas. In some of our other markets that have been harder hit at this time, like California and the Pacific Northwest, we are being very selective or not lending in those markets right now. We are not offering the 30-year investment property loan at this time. In Denver Metro, particularly for repeat clients of ours, or other experienced investors, with high liquidity and credit, who are buying cosmetic flips in solid neighborhoods, we are still closing loans at 90% of purchase price plus 90% of repairs, so long as that loan amount is no more than 75% of the after repair value. Generally, the current interest rate as of this writing is 10% fixed with a 2% origination fee. For less experienced borrowers, the down payment requirement could likely be higher at 15% or 20%. We are still closing loans in about 5 to 7 days, and all of our staff, appraisers, and construction draw account personnel have been working hard like normal, albeit most of us remotely.
What we have been seeing is that things were still going gangbusters until March 23, 2020, when the stay at home order was put in place for Denver and all of Colorado quickly followed suit. Since then, there are still purchases and sales occurring at a regular, albeit slower pace. Some investors are sitting it out for now, which is wise if the investor is not particularly liquid or is concerned about losing a main source of income outside of investing, etc. Other real estate investors who have maintained high liquid reserves and high credit are still buying and in a good position to be able to qualify and to pick up properties with nervous sellers who are needing to get out at lower prices than they would have previously. Inventory is still so low that we have not been seeing radical price reductions in the Denver metro area, which is good for our market health. But, we are seeing $3,000 to $25,000 price reductions at this time, which is helpful to investors.
Given that Denver’s building department is not currently inspecting nor issuing new permits during the pandemic, the projects that our clients are seeking and getting approved for funding at this time are more of a cosmetic nature. For clients who were already in transactions prior to the pandemic, they are still getting contracts, or tenants in the case of fix-and-hold, when the project is priced right from the start, has been fixed appropriately for the neighborhood, and is in a solid neighborhood with good schools, etc. All of those factors for a successful sale applied prior to the pandemic as well, but are even more important now.
We have seen many larger fix-and-flip lenders step out of the fix-and-flip lending space at this time, but other smaller locally based lenders, such as ourselves, continue to lend. We are small businesses too and lending to investors, so we, and other small hard money lenders, are not offering deferred payments at this time and most real investors are not asking for such at this time, although a few are. We have heard that investors do qualify, under the economic relief program, as small businesses, and some have applied for the SBA Emergency Loan or the Payroll Protection Plan loans that are being offered through larger banks. Those are too new at this time to report on any outcome.
We’ve learned from experience that the show must, can, and does go on for those who have the will and the drive, can find a way and get creative, don’t give up, and work hard. Wishing everyone above all else their health and happiness in trying times.
We are here to answer any questions!