The spread of COVID-19 and the resulting economic impacts have upended just about every aspect of our daily lives. We posted a full analysis last week of what that’s meant for the fix-and-flip lending market and our business, which you can read here. We continue to be open for business and have several investment opportunities open now and expect to continue to offer new loans in the coming weeks and months. You can review and invest here: Open Investments.
We’ve also been fielding some great questions from our lender base and wanted to make this information available to others who are likely curious about the same things. Check them out below.
Q: Interest rates offered on the platform seem to have gone up from 8-9% to 11-12%. What’s the reason for this?
A: As the COVID-19 pandemic and resulting shutdowns escalated quickly, investors began to reevaluate what a fair risk-adjusted return was for these types of loans. This is the result of several factors, but generally, the market is now demanding higher returns relative to the perceived risk. One benefit of our marketplace business model is that it allows us to dynamically adjust to the changes in the market and price things accordingly. Right now, investors on our platform are “buyers” at the 11-12% rate, and we’re meeting the market where it's at.
Q: Are borrowers able to continue to work on their projects considering most states have a “shelter in place” order?
A: This is different on a state-by-state basis and is changing daily. Several states have deemed construction an “essential service,” allowing some projects to continue unimpeded. Others have been ordered to stop work and shelter in place. While there is no guaranteeing when these stop work orders will be lifted, we believe that work will be able to commence in the near future with some additional requirements on limiting the number of tradesmen that can be on site at any given time. For projects that have been halted, we’re working with our borrowers to ensure the job sites are being properly secured. We expect new developments on this on a daily basis and are working closely with our borrowers to abide by the rules while protecting and advancing their projects when possible.
Q: Is Fund That Flip offering borrowers any type of forbearance program or making other accommodations?
A: These are certainly unprecedented circumstances, however our intent of keeping incentives aligned with borrowers and lenders remains unchanged. This has served us well historically, and we expect it will serve us well moving forward. The reality is that most borrowers will need additional time to complete the renovations and disposition of their property. We are working with each borrower to assess their individual circumstances and are taking a commonsense approach to developing a workable solution forward. As a lender, you should expect most loans to be extended beyond their initial maturity date to help optimize the end result for everyone involved.
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A: Certain states and other regulatory bodies have announced interest payment “holidays” during the quarantines. We’re investigating how and if these rulings apply to our loans. We believe that the intent of these rulings are to protect homeowners and residents from being displaced from their homes during these unfortunate times. Given that our loans are secured by properties that are not occupied and are commercial in nature, we believe these interest payment “holidays” are not intended for our loans. We have advised all of our borrowers that it is in their best interests to continue to make their payments as it allows us to be more flexible with them on accommodating extensions and advancing construction draws during this time.
Q: How should I be thinking about After Renovated Values (ARV) now? What impact might this have on housing values and demand?
A: This one is admittedly difficult to answer as no one knows what the long-term economic implications will be of the virus and subsequent shut-downs. Check out this podcast we recently recorded with economist Ali Wolf, where we talk about the different scenarios that may play out. This uncertainty in the market is one of the reasons that the rates the loans are paying have increased. Higher risk is demanding a higher return.
Q: What impact does all of this have on Fund That Flip’s business operations? What happens if you go out of business?
A: We raised a round of Venture Capital in August of 2019, have secured additional financing via a bank loan and are applying for the SBA loan program under the CARES Act. We also have a history of financial discipline, having grown the company over 6000% from 2016 to 2019 with just over $2M in Seed Capital. We are keeping a close eye on our financials and are remaining nimble to adjust during these uncertain times. We believe we are well capitalized to weather this storm.
All that said, it’s a good time to remind everyone of the Bankruptcy Remote Structure that we implemented in 2016. We have an agreement in place with an Indenture Trustee whereby if Fund That Flip were to become insolvent, the Trustee would step in to oversee the cash flows of the underlying loans on behalf of the investors. The intent of the structure is to separate the real estate investing risks from the operational risk of the platform. You can read more about this structure here: Investing with Fund That Flip.
Have additional questions for us? Email us at firstname.lastname@example.org and check out more updates about COVID-19 here: Fund That Flip COVID Update. You can also listen to a recent episode of Real Estate Investing Unscripted to hear economist, Ali Wolf discuss the possible effects of the pandemic here.
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