The home-flipping business is booming, and big Wall Street investors are eager to cash in.
Meanwhile, private lenders need a steady flow of capital to continue providing short-term loans to flippers to fund home purchases and renovations.
Somewhere in the middle is San Francisco company AlphaFlow, which buys renovation and resale loans from private lenders and packages them into portfolios for investors. The company gives lenders software to manage the loans and funnel them through AlphaFlow, while giving institutional investors the opportunity to profit from a growing pipeline of debt with interest rates in the high single digits.
The company is expected to announce on Tuesday a minority investment from New York Mortgage Trust Co., a real estate investment trust for which renovation loans have become the fastest-growing segment of its $3.6 billion investment portfolio at the end of 2021.
It's the latest sign that the home resale market is making a comeback in the U.S. after a dip in transaction volume early in the pandemic. In the third quarter of 2021, home resales accounted for 5.7% of all home sales, or 1 in 18, according to a report from Atom Data Solutions, marking the second consecutive quarter of growth after a year of declines.
Other investors in AlphaFlow's latest funding round include hedge fund billionaire Steven Cohen's Point72 Ventures, as well as venture capital firms Level Fund and Gaingels. Financial details of the funding round were not disclosed.
This is Point72's second investment in AlphaFlow, the first being made in 2017 when AlphaFlow's concept had yet to be proven at scale, AlphaFlow CEO Ray Sturm told Insider.
“A few years ago, this was an idea, an experiment,” said Sturm, who estimates his company is in the top three in the home investment loan market.
Sturm said investors covet these types of loans because their short terms — typically six to 12 months — mean they can be repaid relatively quickly. What's more, these loans are backed by more of the borrower's own equity than a standard mortgage, making them theoretically less risky, he added.
“That's good credit to get in and out of,” Sturm said.
While it's difficult to gauge the size of the U.S. home resale market right now, AlphaFlow estimates that home resale value is currently around $75 billion annually, up from $56 billion in 2016, based on Atom's historical figures and the rise in resale volumes and home prices.
New York Mortgage Trust's investment in AlphaFlow is the latest evidence that many of Wall Street's biggest asset managers are taking this type of lending seriously. Sturm said these institutions need a company like AlphaFlow because “we need to get to it at scale,” rather than taking on lenders one by one.
Another big Wall Street buyer was MFA Financial, whose lending subsidiary Lima One Capital raised $1.6 billion in debt last year, a third more than expected for the acquisition price.
Meanwhile, giving private lenders access to the broader capital markets can offer speed and reliability to borrowers and small investors, Sturm said. Working with Wall Street allows these lenders to raise capital more cheaply than relying on a few wealthy individuals, as was common in the past.
Firms that buy loans, pool them and sell them to investors as bonds have felt the pain as rising interest rates have sapped demand for the assets, but AlphaFlow President Noah Martin said the company has diversified its funders and is keeping money flowing.
AlphaFlow expects to be buying about $250 million in loans per month by the end of the second quarter, about five times the rate it was buying a year ago, Sturm said.
AlphaFlow last year also began buying loans to operators of single-family rental homes. Unlike loans for fix-up and flipping, these loans for rental properties have longer terms, typically 30 years. Single-family rental properties are one of the hottest asset classes in the US right now, and Wall Street is “basically lining up to lend to these properties,” Sturm said.
Currently, short-term loans make up roughly 70 percent of AlphaFlow's purchases, with rental loans making up the remaining 30 percent, Sturm said.