New York real estate investors are increasingly turning to construction loans over standard fix-and-flip projects, according to Ruben Izgelov, CEO and Founder of We Lend. The private direct lender, historically known for financing quick-turnaround fix-and-flip loans in New York, now sees a growing share of its loan volume going toward ground-up construction, condo conversions, and building extensions. Izgelov expects this trend to continue through the rest of the year, driven by rising costs and tighter margins that have eroded the profitability of the traditional fix-and-flip model.
“Our borrowers’ returns have been compressing,” Izgelov said. “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.” The shift is evident in the numbers: construction budgets on deals at We Lend 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 property’s purchase price.
Managing the increased risk of larger projects requires a disciplined approach. We Lend, which makes every underwriting and funding decision in-house, requires an architect’s letter confirming that work can proceed as of right, without a rezoning or variance application. On larger jobs, the firm also requires general contractors to sign completion guarantees. “We want GCs committed to the project just as much as the borrower is, without having to personally guarantee the loan,” Izgelov explained. “That keeps the playing field level between the borrower and the GC, especially when the borrower hasn’t worked at this scale before.”
Two recent deals illustrate the range of projects We Lend finances. In one, a borrower purchased an eight-unit bank-owned building and converted it into 16 fully leased units with financing from We Lend. The borrower is now in discussions with banks to refinance and return equity for the next project. In another deal in an affluent New Jersey suburb, We Lend restructured and refinanced a loan for a borrower building a 22,000-square-foot spec home, providing the payoff for an existing private loan and additional funds to complete construction.
Izgelov advises investors moving from fix-and-flips to larger projects to plan for longer timelines. Fix-and-flip loans typically run 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 cautions against building to a trend rather than demand: “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.
