Investing in real estate, especially “flipping houses”, is something that almost everyone has thought about doing at some point in their lives. Getting a real estate investment business started is much more difficult than the TV shows make it out to be. First, you have to find good properties to buy, then you need to know how to fix them up. If you get that much figured out you then need to have access to capital to fund the acquisition, rehab and carrying cost. This leaves many would-be-investors sidelined.Enter Fund That Flip, a New York City based real estate marketplace lender.
AlleyWatch caught up with the company’s CEO and founder, Matt Rodak, to discuss how they’re helping experienced “rehabbers” access capital while at the same time allowing the more “passive investor” to access this desirable asset class.
Who were your investors and how much did you raise?
Tell us about your product or service.
Borrowing money to buy, fix and rehab residential real estate has historically been a painful process for our borrowers. Banks don’t typically fund these short-term loans causing this market to get stuck in the “fax me your info” age. The market has been mostly served by smaller, local balance sheet lenders that haven’t been able to properly invest in technology to make the experience simpler and more transparent for the customer. We’re solving this by bringing it all online, offering simple and transparent processes.
At the same time, thanks to our technology, we can turn around and offer accredited investors the opportunity to invest alongside us in the projects we fund. From an investor’s perspective, this asset class is very attractive but most people lack access to high-quality investment opportunities. Our marketplace and technology enables the whole process, allowing investors to access 10+% annual returns in real estate projects across the country.
What inspired you to start the company?
I started getting involved as an investor with marketplace lenders like Prosper and Lending Club back in 2012. At the same time, I was starting to rehab houses on my own and went through the process of getting a loan for one of my properties. I was shocked by the 18-20% interest rates and it just clicked. Why not apply a similar model that works for Lending Club in consumer credit to real estate and help lower borrowing costs while improving the experience for real estate professionals? So I aborted my plans to be an active real estate investor and started Fund That Flip on the heels of the JOBS Act passing.
How is it different?
95% of these short-term real estate loans are funded “off-line”. This means the borrower has to fill out long-form applications, send them into a company and wait for an answer. With us, a borrower can apply online and get an indication on funding within minutes. Speed and transparency is the most important thing to someone who is about to put down a big deposit on a house. They need to know their funding partner is going to be there for them. That’s what we do. We give our borrowers assurance that if they deliver good deals, we’ll fund them all day long.
On the other side of the equation, someone who has capital to invest and wants to get involved with real estate investing can now have access to a wide variety of projects. We handle all the due diligence, order appraisals, originate the loan according to industry best practices and then invite them to invest with us. This drastically shortens the learning curve while also giving accredited investors the ability to start investing with as little as $5,000
What market you are targeting and how big is it?
We’re targeting experienced “rehabbers” who do between 3-20 projects per year. We estimate that there are somewhere around $60B worth of these loans needed every year.
On the other side of our marketplace, we’re targeting individual accredited investors, hedge funds and family offices that are looking for a platform that can help them source and originate high-quality short term loans that yield 10-14% annually.
What’s your business model?
We charge the borrower an origination fee between 2 and 4% of the loan amount. We also take a loan servicing spread between 1-2%.
What aspect of the real estate market are you looking to next?
Funding short term loans happens to be the biggest pain point for our borrowers. However, there are many other friction points in the process that we think we can reduce or eliminate by leveraging technology. It’s our goal to be the platform that our borrowers run their entire business on. We’ll monetize that technology value-add by being their preferred lender.
What was the funding process like?
It’s hard work but creates focus around what really matters. We talked to a lot of investors and each meeting led to something new for us to think about. That said, I’m happy to be on the other end of it and focused 100% on adding value to our borrowers and lender.
What are the biggest challenges that you faced while raising capital?
There have been a lot of real estate “crowdfunding” platforms pop up since the JOBS Act. We had to fight hard to show how our focus on the short-term residential space was a differentiator and would allow us to be a market leader in the space as it matures.
What factors about your business led your investors to write the check?
Our team was a big factor. We have a great group that has deep expertise in the market we’re serving. Beyond that, we had a track record of telling people what we were doing and then executing. Consistent execution over time leads investors to believe that once the money is in, that speed of execution will only increase.
What are the milestones you plan to achieve in the next six months?
Our goals for 2016 all revolve around People, Process, Product and Partnerships. Ramping up our team for scale, implementing institutional lender processes, continuing to develop our technology product and finally developing strategic partnerships that will help us distribute on greater scale.
What advice can you offer companies in New York that do not have a fresh injection of capital in the bank?
Start developing relationships early, tell people what you’re doing and then execute. If you’re building a business and investors get to watch your progress, they’re going to be crazy to not want to invest as long as you continue to execute your plan.
What do you like to do in your spare time?
I’m originally from Cleveland, so when I get the chance, I love to take in a Cavs, Indians or Browns (yes, Browns) game.