Back in March, we were thrilled to discover that becoming a real estate speculator is easier than we thought. Although bank financing may have dried up post-crisis, it turns out BlackStone (BLK) and a whole host of other PE firms will gladly loan credit-worthy borrowers money to accumulate distressed single-family properties. These newly-minted “investor-landlords” will likely have no trouble locating renters thanks to the fact that many former homeowners lost their residences in foreclosure during the crisis, and have found little economic respite in the anemic US ‘recovery.’ The PE firms who make this all possible are themselves driven by a desire to securitize the loans they make, meaning that in relatively short order, we should begin to see landlord loan-backed paper in the ABS market. 

Today, we get what is essentially the same story, involving the exact same PE firms (BlackStone, Colony (CBAN), and Cerberus) but with the wrinkle that instead of lending money to prospective landlords, the borrowers are house flippers. Here’s Bloomberg:

Real estate buyers seeking money to renovate and flip U.S. houses are getting help from some of the world’s biggest investment firms.

Colony Capital Inc., Blackstone Group LP and Cerberus Capital Management are among the companies that have started making bridge loans to investors who buy homes to sell them quickly for a profit. Borrowing costs -- traditionally the highest in residential lending -- are tumbling as the firms compete for customers.

The foray represents a deepening bet on the housing market by Wall Street-backed companies, many of which have built rental-home empires during the past three years and started specialty-lending businesses to finance smaller investors...

Of course PE firms, who have access to cheap capital, are passing the savings along to speculators (or, put simply, Fed policy is enabling this process)...

Since big investment firms have entered the industry, rates have already come down significantly and fees charged to borrowers, known as points, have decreased as well, according to Fred Lewis, founder of Dominion Group, a Baltimore-based real estate firm that has been lending to house flippers for about 14 years.

“Rates historically were much higher, typically 15 percent with three to five points,” Lewis said. “In the last few months we’ve seen deals being done at 10 percent and two points.”

...and of course this time is different…

The new lenders are focused on more experienced investors, many of whom have have established companies, rather than the amateurs that proliferated during the housing boom a decade ago. Today’s flippers are more sophisticated after the crash weeded out most of the weaker investors, Lewis said.

...except that it’s not…

The hard-money market is getting crowded, which may lead companies to loosen their standards, said Mark Filler, CEO of Jordan Capital Finance, a lender acquired by credit investor Garrison Investment Group about six months ago. His business has more than 300 approved borrowers with credit lines.

“Everybody just jumped in,” said Filler. “The risk is people start to relax underwriting guidelines to chase loans. As this becomes more competitive, there will be more pressure to do that.”

So assuming one wanted to take advantage of the cheap hard money financing, one of the first things to figure out is where the largest profit opportunities lie. That is: where are the profits highest on flips? 

Thankfully — as we first pointed out more than two years ago and continued to parody over an amusing series of satirical articles (here, here, and here) — definitive statistics on profitable home flipping are available from RealtyTrac. The latest figures (out this week), show that the average gross profit on completed flips hit its highest level on record in Q1, suggesting that the Housing Bubble, at least in one incarnation, has returned. Meanwhile, if you really want to maximize the return on your PE-funded speculative investment, there’s no better place to look than — wait for it — Baltimore. You can’t make this stuff up. 

Via RealtyTrac:

The average gross profit — the difference between the purchase price and the flipped price — for completed flips in the first quarter was $72,450, up from $65,290 in the previous quarter and up from $61,684 in the first quarter of 2014 to the highest level going back to the first quarter of 2011, the earliest where data is available…

The challenge for flippers in 2015 will be finding inventory to flip...

Markets with the combination of distressed inventory, affordability and demand that are yielding the best flipping returns include places such as Baltimore, several metros in Central Florida, Detroit, Tucson, Pittsburgh, Memphis and Chicago.

Of course it's all about making money the socially responsible way...

“Responsible flippers in these markets can do well by doing good — providing a superior product for buyers and renters — although in some cases this may mean betting on neighborhoods that are somewhere between down-and-out and up-and-coming (ZH: and presumably not on fire)

On average, you will double your money flipping homes in Baltimore...

Among markets with at least 50 completed single family home flips in the first quarter, those with the highest average gross ROI were Baltimore (94.1 percent), Deltona-Daytona Beach-Ormond Beach, Florida (74.7 percent), Ocala, Florida (73.9 percent), Lakeland, Florida (62.5 percent), and Detroit (58.3 percent)...

 

And of course the markets where flipping accounts for the highest percentage of total single family sales are none other than California, Florida, and Nevada, some of the very same markets which were at the epicenter of the housing bubble...

These homes are being flipped not to proud new homeowners at affordable prices (which would indicate that indeed, easy money policies are finally trickling down to places like Baltimore), but rather to other "investors", as the percentage of completed flips going to non-owner-occupants hit its highest level in 4 years during Q1...

This leads us to one very sad (albeit comically absurd) conclusion. Let's recap. PE firms are using their access to cheap cash to lend to both landlord-investors and to home flippers. The percentage of completed flips sold to "non-owner-occupants" is hitting multi-year highs with each passing quarter. "Non-owner occupants" are defined as "real estate investors and second home buyers." The punchline to the whole thing then, is that there appears to be a very real possibility that Wall Street is effectively flipping homes to itself and securitizing the loans along the way.

So thank you Wall Street, for proving yet again that absolutely nothing has changed.