Are we seeing the next bubble form right before our eyes and ignoring it?
After reading the Bloomberg article over the weekend about how flippers are looking to crowd funding and institutional lenders more and more to fund their investment deals, this has the 2000 dot.com crash written all over it.
In 1999 mom and pop saw the NASDAQ, specifically internet stocks (companies that were not making money) have some historical runs, making some millionaires in just a few days or weeks. Having been a Stockbroker in 1999 I remember that run-up very well. You had people taking 2nd mortgages, buying on margin, dumping kids college funds into these stocks, just buying either because they thought they couldn’t go down, everyone else was making money doing it, or we could be rich and not have to work if things keep going like this.
In 2015 mom and pop see flipping houses as the next “get rich quick”. They are unloading IRA’s and 401ks’ paying 10’s of thousands for “education” and then highly leveraging flips (just like buying on margin) just to get a piece. Sound familiar?
What people don’t realize is mom and pop are usually the last ones invited to the party.
So, you ask, where’s the risk?
With the private money/hard money sector being roughly a 30B industry, you are seeing an influx of people, specifically with crowdfunding websites, popping up trying to grab their piece of lending to investors. What these companies/individuals don’t see is the big picture. Yes, there is money to be made short term, but what happens when the music stops? What happens when mom and pop need their money back and their investment is not liquid? With the competition being created, we all know that relaxed underwriting guidelines are not far down the road.
When these “lenders” start to chase loans because they need the revenue, the end will not be pretty.
While I am not discouraging house flipping, being a lender I do watch out for the signs. Remember, those that ignore history are doomed to repeat it!
Warning : lending at a high loan to value, or at 100% will be damaging to your pockets. Maybe not today, but look back on this article at the end of 2016 and let us see how many of these funding sites blow themselves and their investors up.