Real Estate News

This company wants to loan you money to flip Charlotte houses. But is it worth it?

Profits from flipping homes are slipping but the practice remains more popular than ever in Charlotte, with startup and other companies now lending to eager renovators.

A slew of companies and individuals are looking to make a profit from the trend that has become the subject of television shows like HGTV’s Flip or Flop. Property data provider Attom Data Solutions, which tracks the practice, defines home flipping as the same property selling twice in a 12-month period.

The number of homes flipped in the Charlotte region reached an all-time high in the second quarter this year, at just under 1,200, according to Attom’s latest report. That’s about 9% of all home sales.

Now, the industry is receiving an additional boost: a North Carolina-founded company said Friday it is making a push into the Charlotte market, offering $10 million in financing for flipping houses. It’s one of multiple companies that have cropped up to underwrite the fast-growing industry.

Groundfloor, which started in Raleigh in 2013 as a crowdfunding startup, offers loans to developers and others who want to purchase, renovate and resell a home.

Brian Dally, the company’s CEO and co-founder, said the lack of housing inventory in Charlotte is part of why his firm decided to expand its presence in the area. For first-time buyers especially, a recently renovated home is typically less expensive than newly-built houses, Dally said.

Still, flipping a house is often not as simple as it looks on TV ⁠— or as lucrative.

Profits from the practice are on the decline, Attom’s data shows, as housing and renovation costs rise. And consumer advocates like the Better Business Bureau caution that the expenses are often higher than many people anticipate.

Access to credit

When Dally started the company, his goal was to give everyday investors a chance to put their money in real estate. He’s offering the same to Charlotte investors, who can put up a minimum of $10 into specific properties. The company says the average return is between 10% and 12% within a year.

Brian Dally Groundfloor.jpg
Brian Dally, CEO of the crowdfunding startup Groundfloor, which was started in Raleigh before moving to Atlanta. Kevin Voth submitted

The majority of homes that are flipped in Charlotte are purchased with cash, according to Attom’s data.

But Ryan Battle, managing partner of QC Home Buyers, said without having significant capital, Groundfloor and other lending platforms have allowed his company to expand. The Charlotte-based firm recently closed on its 100th sale.

It’s difficult to receive funding from a traditional bank to finance home flipping, Battle said, especially for small companies. That’s where Groundfloor, LendingHome, Lima One Capital and other lenders come in.

“You’d have to know someone really rich that wants to risk it on you,” he said. “And we don’t really have that in our back pocket.”

He said Groundfloor’s up-front fee is slightly higher than other lenders, but he likes the flexibility it provides. For example, Groundfloor allows borrowers to defer interest payments until the end of the loan term.

Groundfloor’s loan durations range from six to 12 months, and average rates fall between 7.5% and 11%, said Patrick Donoghue, senior director of market development. There are also fees of about 1% to 4.5%.

The money is generally given out in four phases as the renovations take place, with the company inspecting the work at each step.

Groundfloor’s average loan is for about $150,000, and it’s looking to lend money for about 100 projects in Charlotte by the end of the year. In Atlanta, where the company is now based, the firm makes between 20 and 30 loans a month.

Our model really enables a real estate investor who is independent,” Dally said, rather than lending to large companies.

Lower profits

Flipping houses is not as profitable as it once was in the aftermath of the recession, when prices were low and there were numerous foreclosure sales.

The number of home flips increased 54% in the second quarter of 2019 in Charlotte compared to the year before, Attom’s data shows. But the median gross profit on a Charlotte home flip, before rehab costs and other expenses, dropped 35% from last year, from $57,700 to $37,250.

That’s far below the national average of $62,700, according to Attom.

One reason for declining profits: the rising cost of purchasing a home. The median sale price for a home in Charlotte was $259,479 in September, an increase of 10.4% from last year, according to data from the Canopy Multiple Listing Service.

Battle said he and his partner almost always buy houses before they hit the market. Even when he’s been to foreclosure auctions, he said, his company is competing with out-of-state companies that have Wall Street backing. Invitation Homes, Tricon American Homes, American Homes 4 Rent and others have purchased more than 10,000 houses in the region and turned them into rentals, according to a 2017 Observer analysis.

Unlike those firms, which might pay a premium, Battle said he’s on a strict budget for each house.

“It’s hard to build a scalable business model on you hoping that you don’t get outbid by someone that has billions of dollars in their pocket,” he said.

And companies like Offerpad, Opendoor, and others are also disrupting the market, buying houses directly from owners, fixing them up and selling them.

Unexpected costs

The five-bedroom, three-bathroom house in Cotswold is almost unrecognizable from when QC Home Buyers and its partner Southern Home Group purchased it for $170,000 last year.

The firms gutted most of the interior, put in new hardwood floors and a kitchen, added about 1,200 square feet and replaced the roof, among other changes. Even after renovation costs of about $150,000, Battle’s company will basically break even when the sale closes in November. The costs ran $30,000 higher than he expected.

The Cotswold house prior to the renovations. QC Home Buyers and its partner spent about $150,000 on work on the property, and will basically break even. Courtesy of QC Home Buyers

Because his company has $3.5 million invested in 43 ongoing projects, he can make up that profit elsewhere.

But experts offered caution for those who might want to just fix up a house or two on the side.

Some of the educational materials around flipping, especially those written by the industry, downplay the full cost associated with renovating and reselling a house, said Tom Bartholomy, president and CEO of the Better Business Bureau of Southern Piedmont.

Bartholomy said people looking to take out a loan with Groundfloor or another lender should take extra care in doing due diligence on the property.

“If you’re sitting on a home that you’ve purchased, you’ve financed through this company, you’ve put the time and materials into fixing it up and then you can’t sell it, that loan payment is still due,” he said.

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Danielle Chemtob covers economic growth and development for the Observer. She’s a 2018 graduate of the journalism school at UNC-Chapel Hill and a California transplant.