By Mary Shanklin
Orlando landlord Brian Lunsford needed $40,000 to renovate a house that a college student almost burned down, so he turned to an online crowdfunding site.
Within two days, more than a dozen investors had each agreed to loan him an average of $2,800 for up to 13 months.
“He left a candle burning and it did significant damage to the interior,” Lunsford said. “I’m fighting it out with the insurance company, and I was going to front the money myself, but it was $40,000 to renovate. … that’s not easily financeable.”
Crowdfunding is just one new financing option that has emerged in a metro area where 56 percent of all home sales were paid for with cash in May, according to RealtyTrac.
Recognizing that community banks and institutional lenders are reluctant to loan money to house flippers and landlords, several companies have started offering cash to real estate entrepreneurs in the Orlando area.
But the borrowed money doesn’t come cheap.
Lima One Capital LLC, which offers loans to residential real estate investors and homebuilders, opened an Orlando office this month.
Launched in 2010 in Atlanta, the company offers short-term, fast-approval loans with interest rates of 12 percent to 13 percent to residential real estate investors and homebuilders — about three times higher than normal mortgage rates.
Last year, the company loaned $485 million in 12 states.
“Orlando has very depressed home prices that are 33 percent behind peak-level pricing, and it lags behind the rest of the nation,” said Lima One founder John Warren, a former Marines infantryman. “And that means there is going to be a lot of investors because they think the growth is going to be there.”
In Lunsford’s case, the individuals who loaned the money will earn 9 percent interest. Lunsford has agreed to pay 11 percent interest on the short-term renovation loan, and the crowdfunding platform he used, RealtyShares.com, will keep the 2 percent difference for doing the marketing.
Cary Berman, executive vice president of Old Florida National Bank, said the type of loans being offered by Lima One Capital and RealtyShares are new to the Orlando area but not necessarily worrisome for a recovering housing market.
“I think they’re on to something in an underserved market, but I don’t believe it impacts or affects our market,” he said.
Old Florida typically appeals to low-risk borrowers who have just a few residential properties rather than landlords and flippers who constantly buy and sell houses, Berman added.
Berman said he appreciated that nontraditional funding sources such RealtyShares and Lima One don’t offer federal-backed loans, so only private equity — not taxpayer dollars — is at risk.
Typically, investors used their own funds or that of friends and family members for short-term investment strategies including those involving home renovation and flipping.
Robert Luis Castillo, senior vice president for Synovus Bank in Orlando, said traditional lenders have typically shied away from spending their resources on loans for less than, say, $100,000.
“Additionally, there are numerous risks associated with rehabbing houses that the casual investor may not be fully aware,” he said. “It only takes a few miscues to create the proverbial money pit.”
A more traditional source of funds for these buyers are equity loans, which have interest rates of about 4 to 5 percent.
Based in San Francisco, RealtyShares launched in 2013. It is exempt from Securities and Exchange Act regulations because it connects borrowers only with “accredited” investors.
Those lenders have affirmed that they have income levels of at least $200,000 or have at least $1 million of assets. RealtyShares runs credit and background checks on the borrowers and checks on the property being purchased.
“We’re never the sponsor of the loan and we’re only the marketplace,” founder Nav Athwal said. “We’re trying to provide an alternative to banks.”
If Lunsford can’t repay the loan, his fleet of lenders have the legal footing to file a lien against the house and get their money back when it sells.
Lunsford said he said he first began buying houses after the housing market crashed starting in 2007.
At the time, he had just sold a gourmet-coffee business in Atlanta and had cash for properties. But he was keeping most of the homes he purchased and renting them.
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With few sales to help pay for more houses, his funds began to run short in 2011 and he went from buying two or three houses a month to purchasing one every two months.
“It was really frustrating because there were so many deals and the reason there were so many deals was because no one could get the money to buy,” said Lunsford, who had turned to community banks and national lenders with no success.
He said the RealtyShares option helped him get the cash on about a dozen of the 50-plus rentals he now owns in Orlando, Jacksonville and the east coast of Florida.