New York real estate investors are moving away from traditional fix-and-flip projects and turning to larger construction loans, according to Ruben Izgelov, CEO and Founder of We Lend, a private direct lender based in New York. Izgelov says the standard fix-and-flip model, which involves cosmetic renovations and quick resales, no longer generates the returns it once did due to rising costs and tighter margins.
“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.” This shift is reflected in the numbers: construction budgets on deals through We Lend have grown from $100,000–$200,000 to $1 million–$2 million, and in some cases the construction budget now exceeds the property’s purchase price.
We Lend, which has historically been known for quick-turnaround fix-and-flip loans in New York, is now financing ground-up construction, condo conversions, and vertical and horizontal building extensions. The firm is backed by the entire capital stack and handles underwriting and funding decisions in-house, allowing it to take on more complex projects.
Managing the increased risk of larger projects requires stricter documentation. We Lend requires an architect’s letter confirming that work can proceed as of right, without rezoning or variances. For larger jobs, general contractors must 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 said. “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. In one, a borrower converted an eight-unit bank-owned building into 16 fully leased units, with We Lend providing financing. The borrower is now discussing a refinance with several banks to return equity for the next project. In another deal in a wealthy New Jersey suburb, a borrower building a 22,000 square foot spec home needed to pay off an existing private loan after a lot line sale. We Lend restructured and refinanced the loan, providing the payoff and additional funds for completion.
Izgelov warns that investors moving into larger projects often misjudge the timeline. Fix-and-flip loans typically run six to eight months, but ground-up construction and major conversions 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 trends rather than demand: “If there’s demand for a project of that size or caliber, great. But 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.
