Oregon Rehab and Construction Projects: Insights from a Local Lender - Cetan Funds

Speaker: Zach Smith, Principal & Senior Lender, Cetan Funds

Zach Smith: Some trends that we're seeing in rehab projects here in Oregon include kind of two different directions people are going in given the cost of construction and given the slimming profit margins and potential struggles to sell their properties. With the interest rate increases, a lot of our borrowers are drifting toward more of a light cosmetic type of project, something that they can move extremely fast on, and something that's not gonna take a lot of time investing in permits, and adding square footage or changing floor plans. Going way more light in their cosmetic flips in order to turn it fast. That's one trend that I'm seeing with a lot of our clients is they're looking for those types of opportunities. The other trend would be kind of in the opposite direction. Recently, the state of Oregon passed legislation that allowed for middle housing land division and what they mean by middle housing is they're trying to create more affordable units. On single family residential property, you can now create duplexes, triplexes, fourplexes and actually take the parent single family lot and divide it into child lots and with the child lots, you can actually have individual units. So you could take a duplex divided in two and sell off each unit individually. You'd have to basically condominium them, set up an HOA and then sell it off individually. So a lot of our borrowers are looking at those types of opportunities. A great example is taking a single family home with a detached ADU, dividing off the ADU, and now you have two properties that can be sold separately. Other builders or investors of ours have taken residential single family lots and now been able to do things like ground up construction with townhomes. The problem with this for a lot of our clients is that it's very time and capital intensive. And they need to have the wherewithal to take on projects of of that size. So a lot of our borrowers would go more down the first path, sticking to more of a light, streamlined rehab project versus some of the more cost, in terms of time and money, intensive projects with middle housing development projects.

Zach Smith: Some challenges our rehab clients, our flippers are seeing right now, definitely a lack of inventory. It's difficult to find deals. It's also difficult to make them pencil and have good profit margin. Properties in certain price points are not selling as quickly as they were. Obviously, the interest rates have slowed down the real estate market. Days on market are now stretching 30, 60, 90 days, sometimes longer depending on what price point you're in. So it's far more difficult to sell the property and get to that end profit. So a lot of the challenges have to do with that, but also the cost of construction in Oregon tends to be really high. So budgeting for the rehab effectively is incredibly important for our clients. And that's where experience and working with good quality contractors, if they're not contractors themselves, is absolutely critical. And yeah, I think those are basically some of the biggest uh roadblocks for a lot of our clients, obstacles that they're facing here in 2023.

Zach Smith: In terms of cities or neighborhoods that we're seeing the most rehab activity... we get business all over the state, but in particular, we see most of our business in Eugene, in Lane County, also in Salem and up in the Portland Metro. Of course, that's always been a busy market. We have some limited activity over on the Oregon coast. Florence, Newport, Lincoln City, all the way up to seaside Astoria. We are seeing some activity over there, but most of our rehab projects are going on in areas of Salem or Eugene or Portland that are slowly getting gentrified, especially a lot of like older, smaller bungalows and those types of properties that are getting gradually fixed up and improved. We're in desperate need for affordable housing. So that's where a lot of investors tend to focus is in those pockets of these major metro areas in, in the state of Oregon where they can stick to affordable price points, which in our market tend to be $400,000, maybe $350,000 or less, depending on where you're at. We're also seeing a lot of activity in the Mid-Willamette Valley, in particular places like Albany, Lebanon and Sweet Home. In those locations, buyers can find properties with a little bit more room, some acreage and again, at lower price point. So there tends to be some pretty good opportunities for flippers in those markets as well.

Zach Smith: The types of projects that we like to lend on I would like to say all of the above. We tend to be a great fit here at Cetan Funds for funding high value-add opportunities in particular with heavy rehab or heavy construction components to them. We are a private equity fund and can fund a lot like a bank in terms of you know, more traditional construction lending process, there's no dutch interest, we only charge on the outstanding balance. Our draw process is incredibly streamlined. Our borrowers work directly with either me or one of our other loan officers for their disbursements which are usually accomplished within 24 hours. And we do our own inspections and all of that construction, draw management. So our borrowers really enjoy that from a construction standpoint. We also are really effective at land development and providing funds for really creative opportunities such as condominium conversions or middle housing, land partitions. We've kind of done it all. We have a background in development. So we're very familiar with the process and being extremely local and knowledgeable of local cities and counties and some of the hurdles in those processes with land divisions or setups of HOA's and things of that nature. We can be very helpful for our clients and provide them the type of flexible financing advice and counsel that they need from a good financial partner in their development projects.

Zach Smith: For our rehab loans, we go up to 75% of the after repair value or 90% loan-to-cost being the combined purchase and rehab. That's for our newer borrowers. Sometimes with our more experienced clients, our repeat borrowers that do lots of projects with us, we can actually go up as high as sometimes 100% loan-to-cost. And our after repair value is dependent on our own internal valuation. We don't require appraisals or broker price opinions unless the property is highly unusual or it's a larger loan amount for most fix and flips. We just do it in-house. Um And we can get to an underwriting decision in just a few days. Usually on flip projects, we're funding 100% of the rehab with a credit line. And then the rest of the loan is advanced on the purchase and most of the time our borrowers are putting anywhere from 10% to 20% down on the purchase price. Very rarely do we find a good enough deal where we can do 100% financing. But sometimes for our more experienced clients, that is definitely the case. We also are pretty flexible with loan structure. We can deal with subordinate seller notes, for example, or other subordinate debt. We have some gap funders that we've partnered with in the past and we try and provide that flexibility for our borrowers so they can capitalize on all sorts of opportunities. And we can also for any projects that include partitions development, like value-add, or like I was talking about before, middle housing, land development opportunities, we can actually consider some of the value of the partitioned land as a part of our after repair value. It depends on the scenario. I'm happy to look at any projects and provide a flexible option that would be, suitable to fit our borrowers' needs.