California Hard Money Fix & Flip Insights

Get an update on California hard money fix & flip lending. Rocky Butani, CEO of Lender Link, interviewed Todd Piggott, CEO of Zinc Financial, about the current trends, strategies and most popular areas investors are capitalizing on, while also advising caution regarding some challenges facing investors in today’s market. Watch the video or read the transcript below.

Rocky Butani:

Your company lends nationally, but you’re based in Fresno, California. Historically, California has been where you’ve done most of your lending at this time, What is different about California compared to the rest of the country in terms of fix and flip investing and lending?

Todd Piggott:

So we are a California based lender. We do lend nationally, but over two thirds of our lending is in the concentration of California. I’m a big fan of California. It’s the fourth largest economy in the world. More importantly, I get some data directly from the General Services Administration. I pay for this and I extrapolate it. I check the mortgage servicing and mortgage call volume reports for the servicing centers of performing mortgages across the country. California right now is at the top. In other words, mortgages are performing in this state at an extremely high level as compared with the rest of the country. On top of that, the absorption rate here for real estate, which is the pace for which real estate eventually moves off the market, is also an exponentially swift pace. Now, I know there’s a lot of people out there that are ba-humbug on California, and a lot of those reasons are actually materially true, but for the most part, real estate is moving at a fast clip. Mortgages are performing at an exceptionally high level here as compared to the rest of the country. And what that means is that we’re not having the defaults here to depress prices, mortgage velocity is at an all-time high. And it’s a very safe place for us to put our capital as far as liens. Finally, I would say this last month, all of the counties except for two, had an overall sales price that was higher than the list price. So we’re still in a very, very competitive market here. Prices are being accepted with the exception of two counties above asking and a very strong economy, with exceptionally strong performance on the mortgage portfolios that are issued here. So for us, it’s a very, very strong place to be. What am I seeing on the fix and flip markets specifically? Rates are very, very competitive. Fees are very, very competitive. Money is very fluid here. So what we have here is an exceptionally competitive market, probably for the same reasons that I’ve just announced.

Rocky Butani:

And what about, any trends that you’re seeing with your fix and flip investors in 2024 versus in the past?

Todd Piggott:

Absolutely. I think what I’m seeing now is more larger deals with more larger rehabs. And so, what I would call that is more of a heavy value-add, you know, heavy value-add. People are doing some very large deals in Laguna Beach or San Diego or other proximities, and they’re also doing very large rehabs. And I think that’s necessary today and necessary today that you have to create value in that property as opposed to just doing a paint and carpet and then selling it to earn money. Today what I’m seeing is larger deals and larger, larger rehab budgets.

Rocky Butani:

And how about ADUs (accessory dwelling units)? That seems to be a popular thing these days.

Todd Piggott:

When ADUs were first announced, I was very, very skeptical. Very skeptical. Who wants a separate unit in their backyard? Not me, but I’ll tell you what, they are extremely popular and extremely beneficial and adding exceptional value. As a matter of fact, a law was just passed here, and that law states that a person who owns the ADU in the back can now separate that from the APN and sell it as an individual property. This is creating even a better situation for those ADUs in the back because you now have an actual deed, an APN or whatever you wanna call it, that’s collateralized. So the fact that they could peel that off of the original settlement and sell that separately is creating even more value. I think ADUs are fantastic. You’re creating value, you’re creating a much needed housing. Housing is in a deficit here, and you’re creating a much needed product. Finally, I would say this, there’s a lot of elderly. There’s a lot of single people, in California, the average age of marriage is now 29 and a half for male and 28 and a half for female. What we have in childbearing is dropped in California. What we have here is this younger group that is not buying a house, getting married and having three kids. They’re very mobile. They’re maintaining a single life and more of a socialite status. On top of that, we have a lot of elderly in the state. So the ADUs are providing a real spot for single people, unmarried people, as well as older people. So I’m a big fan of that. We financed many of them, and they rush right through our underwriting process. Because absolutely, it’s not only value-add, it’s moves quickly. It’s very, very helpful to the overall climate out here.

Rocky Butani:

What are some of the challenges that your borrowers are seeing at this time?

Todd Piggott:

Permits. Permit issues very slow, very drawn out. There, there appears to be a lag in the permit process or permitting that I have not seen before. I attribute this to the remote nature of some of these governmental entities. For instance, next door to me Was Pacific Gas and Electric, and they were the company that did easements, for when people needed easements at intersections. And this building next door to me is probably 10,000 square feet and a lot of people that work there. The building is from the seventies and it’s been home to PG&E’s easement process for the better part of a half a century. But since Covid, they’ve all gone remote. And so the building’s been sold and it’s been repositioned. But all of those people that worked for Pacific Gas and Electric and the government entity that process those easements are now working remote. Well, easements used to be done in three weeks, and now they’re being done in about six months. Why? unfortunately, I believe that that remote aspect has slowed that process. They’re no longer in an office expediting that workflow. So to my point, I think a lot of the governmental agencies have become a little bit hampered by some of these facets. I will share with you that I happen to be a road biker and my two road biking buddies both work in upper management executive level in the government, in the permit process. And both of them have, on my road bike rides have explained to me that they’re all remote and they’re in management and their ability to function has been hampered by that. So I think there’s some validity to that to my two friends that I rode bike with. So permits are an issue, getting permits done are an issue. And that is dragging a little bit on our ability to function out there.

Rocky Butani:

How about inventory? Is there a healthy amount of inventory for house flippers to acquire properties?

Todd Piggott:

So that’s a double-sided sword. You know, back in 2007, I used to drive around and there was inventory everywhere, but you couldn’t sell anything. It was nine months to be able to sell that product. So when there’s a lot of inventory, your exit strategy is deflated. At the end of the day, there’s that demand is lacking, which is why there’s so much inventory. So when there’s no inventory, that just means demand is very, very high. And your exit strategy very, very strong. You can’t have it both ways. Inventory is very difficult to find right now. Auctions, off-market wholesalers, it can be found. It is out there, it just takes more work. But it is less. But by that same token, your exit strategy is, is very, very strong. When there’s a ton of inventory be concerned because your exit strategy is gonna be very weak. That’s telling you that the market has slowed considerably And maybe a recession or whatever you wanna call it. And to that effect, your exit strategy for repositioning and that reselling that asset on the open-market has dwindled.

Rocky Butani:

And speaking of exit strategy, everyone thinks California is just so overpriced and maybe it doesn’t make sense to rehab a property and then rent it. Is there any truth to that, or does that just depend on what part of California you’re in?

Todd Piggott:

I’ve personally bought nine homes in the last three weeks personally for rentals. I’m rehabbing them and I’m turning them into rentals. LA the week before that, I bid on a portfolio of loans of seven and before that, a portfolio of 23 all to be rehabbed or rented. But guess what, they’re not in California, they’re back east. The rent ratio out here is very problematic. My in-laws or my, an extension of my family owns about 200 homes. And they also manage about 2000 largest property manager and one of the larger property owners here in central California. And what they rent for compared to the value of those homes, it just doesn’t make sense to buy a property here and rent it. It would be very, very difficult to, with the opex factor vacancy and property manage would be very, very difficult to get that to cash flow. Now, my in-laws manage 2000 of them and nearly 100% of their client base are people that have owned the homes from the seventies through the nineties. Nobody has entered their space here recently. Nobody that went out and bought a house And wants to hold it for a rental. And nobody has gone to them with the, well, I think, I think Mike said there might have been two that have gone to ’em and said, Hey, I can’t, you know, we wanna move, but we wanna keep the house. Can you rent it? Well, that $700,000, $800,000 house is gonna rent for shockingly, you know, $2,400. So rental out here is very problematic. It does work in some high-demand areas, coastal or some high-demand areas in LA. So we are seeing this multifamily going up with studio in one bedroom that are catering to the young mobile transient group. So that is working, I would call that class A, rental studio in one bedroom that is working. So multifamily for Class A that is catering to that young mobile transient group is working. I see a lot of apartments renting in LA for $3,000 and $4,000 as well as coastal regions, things like this. But as far as buying a house and renting that, I don’t see that as likely in this state anytime in the near future.

Rocky Butani:

California is like a country, it’s just so big and you’ve got all these different regions. Can you tell us about what you’re seeing in the different markets – Central Valley, Bay Area, LA, Orange County, Inland Empire, San Diego?

Todd Piggott:

Southern California is very, very strong and it’s continuing to be a very strong climate. The Central Valley where I reside, call it the Bakersfield, call the Sacramento to Bakersfield before you hit the grapevine and go SoCal is probably the strongest market in the state. So Southern California is landlocked, Northern California is landlocked. So the population growth, believe it or not, people are continuing to move here, is all being hyper-focused on the Central Valley where I’m at. And so the Valley is seeing exponential growth in the tens of thousands of homes being built. So the valley is proving to be a very, very good spot for investment. Southern California is still showing to be a very good spot despite all the news stories of homeless and theft and things of that nature. Believe it or not, it’s the prices there are selling at or above list price and it is continuing to go on that trajectory. The Bay Area is starting to have some problems. Bay Area is definitely starting to have some problems. We have a foreclosure in Oakland, two bedroom, one bath, $1.3 million. We’re seeing a little bit of stress there. San Francisco, a little bit of a stress there. So we’re starting to see the markets in Northern California dip a little bit. Now, keep in mind they’re in their own little country up there. Just two weeks ago, governor Newsom, had to deploy 500 California highway patrol from Southern California up to Oakland to fight a crime spree that was radically out of control and, and close to calling in the National Guard. So we have Oakland that is spiraling with crime and storefront robberies. Denny’s and Starbucks have left there, Macy’s and Bloomingdale’s has left San Francisco. We’re starting to see the turn of national retail tenants leave those areas because of the crime, because of the drugs and because of the homeless problem in those areas, to the point where we had to deploy 450,500 CHP, to come in there and try to stabilize the unrest in that area. So Oakland, San Francisco, and some of those bay areas we’re starting to see some conflict there, and that’s starting to affect the housing situation there. So we’re still strong on it. It’s still can be done there, but it’s something that we’re watching very, very carefully.

Rocky Butani:

Let’s dive a little deeper on the Central Valley because it’s such a wide, massive area. You talking about, you know, the North end is Sacramento and that Sacramento, greater Sacramento area is its own metro area, and then you go all the way down to Bakersfield. What are some of the hotspots that you’re seeing?

Todd Piggott:

So again, you know like San Jose, you know, $1.5 million for a median-cost house, same thing in Oakland, $1.8 San Francisco, It’s above $2 million. You know, these areas are so congested that to live there is just unfeasible For a normal W2 worker, very, very difficult. I mean, how is a policeman and a teacher going to afford a home In San Francisco, they actually did a study and it’s 11% of the education or public workforce could afford a home there. That’s a problem. And so the central California region, which is where I happen to physically live, is wide open. It is vast and large and for the most part, relatively undeveloped. It’s very hot here, very similar to Phoenix or Las Vegas, but construction here is as booming at an exponentially fast rate. My son 23 just bought a property at Mission Viejo, and that’s in Madera. 4,000 homes have gone up there in less than two years. It’s exploding with growth. So what we’re seeing is the Maderas, the Fresnos, the Visalia, Tulare, Kern, these areas are starting to get in massive subdivisions of houses because this is the last place, this is the last place, the last place of affordable housing in this state. Our median cost of housing in Fresno, we’ll call it the Central Valley, it’s still around 300, where the rest of the state it’s 800. So if you have a family, you know, three kids and a dog and a white Honda Accord, and you want to get a house at the front yard and the backyard, you’re probably gonna have to look at something like this. And so, yes, it’s hot here. Yes, we don’t have the amenities of Southern California, San Diego, there’s absolutely no comparison. But for a family who does live in California that would like a house, you can get a house here for $400,000 where in San Diego they’d be $1.4 million. And so that’s attracting a lot of those people that are, I would call it this group of people, they’re past the socialite experience. They’re no longer young. They’re middle aged. They don’t care about the wine bars or the restaurants quite so much. There’s a gym and there’s a church and there’s an Applebee’s. They’re fine. That group with two kids and a dog is starting to progress here, live here, develop roots here and grow here. And the housing is exponentially growing to accommodate that demand.

Rocky Butani:

Great. And what’s your take on Sacramento in terms of its housing situation, prices and flipping activity?

Todd Piggott:

Sacramento is doing fine. I have no issues with Sacramento. We’re very, very heavy in our lending up there. Very excited to be there. It is a blend between high priced Bay area and high-priced SoCal and economical entry-level of the Fresno or Central Valley. So we are doing activity up in Sacramento. We see it as being relatively robust. Albeit, they too are on the brink. They’re on the outside skirt of some of those problems that we’re seeing in the Oakland and the Bay Area. So we have to watch out for that. Being careful there as well.

Rocky Butani:

Let’s talk about Zinc Financials loan program. And most of your loans are rehab, fix and flip loans. Could you give us an overview of what the program is, what the requirements are, leverage, etc.?

Todd Piggott:

Yeah, so we’re doing quite well on the fix and flip. Our leverages are right now, believe it or not, and I know this is surprising, all of Central California, we’re actually at about 93% on the purchase price right now. So we’re very, very aggressive on everythingthat’s in Central California. Why, because I know that area extremely well and I’m very comfortable in it. The rest of the state we’re also at about 90%. And then from outside of California we dip back to 85%. Now when I talk about the 90% or 93% leverage in California for Zinc, I’m referring to it what we call a tier three and a tier four borrower. That’s somebody who’s done three or more flips within the last 36 months. So for those people that are well qualified with credit, liquidity and experience, we’re at 93% for all of central California, 90% for the rest of the state. As we get into areas that we’re less familiar with, which we call that back east, we dip down to 85% on the tier three and tier four borrowers. So at any rate, yes, we’re very aggressive and we’re very bullish on our leverage. Our rates are between 9.99 and 11.99. Go down to a half a point. I would say our average loan is about 1.25 right now.

Rocky Butani:

And what’s the maximum loan amount that you could do?

Todd Piggott:

We have up to $1.5 million. Now we do some $2 million and we do some $2.2 million. We’ll do a $2.3 million, but anything above $2 million or really anything above $1.5 million has to be an exception on a case by case basis. And that would have to be in an area with, for instance, the one we did for $2.3 million is in Laguna Beach. Well, everything in Laguna Beach is $3 and a half million. So that kind of works for us. So we prefer to stay at the median cost of housing or under and so we stay by those guidelines, but we will do larger loans so long as it’s in an exceptionally desirable area.

Rocky Butani:

And how about requirements? Do you work with borrowers that don’t have experience? What your credit score requirements?

Todd Piggott:

Yeah, so we have a six 60 minimum FICO. We will go lower on the FICO if it’s because of trade line usage and not negative derogatory. We do work a lot with beginning investors. So about 50% of our business is beginner. We do work with beginners quite often. We call those tier one or tier two. However, we do dial back the leverage by about 5%. So our beginning investor can look at a, probably an 80% loan to purchase loan to cost ratio, about 75% ARV. We do limit their exposure to about $750,000. And we wanna see them in a rehab of less than $150,000. We don’t want them getting going over their skis and their first project. Listen, it all looks pretty at that. I call it balloons and confetti shows. They sell you the CDs and they tell you how to flip and grow rich and it all looks pretty. But I say there’s only three outcomes in this business. Three outcomes only three outcomes are guaranteed. Number one, it’s gonna take longer than you think. Number two, it’s gonna cost more than you think. And number three, it’s gonna be more of a hassle than you think. And so with those three guaranteed outcomes of this business, I have fixed and flipped over a hundred million dollars myself. So in this business I can assure you that you were gonna run into a lot of pitfalls, a lot of problems, and a lot of cost overruns. So with that, we like our beginning strategy to be under $750,00 and under $150,000 in rehab. So they don’t get it over their head. On an experienced person, we’re a little bit more liberal. We’ll go up to 92 and a half, 93% on the valley, 90% overall. And because we’re a little bit more comfortable in that dynamic.

Rocky Butani:

And with the credit score, you mentioned that your minimum credit score is 660. What’s the reasoning behind not considering borrowers with a little bit lower than that?

Todd Piggott:

So the way FICO works is they ding you for some things that I think are not indicative of a true credit score. For instance, my father-in-law has about a 650. He has about a hundred mortgages on his credit. And so that utilization is driving down his credit score. But my father-in-law’s trade lines are four and five pages deep. That’s the borrow we want, even though it’s FICOs say 650. Now my mother-in-law has a 790 FICO. Well she’s been a homemaker for 25 or 30 years and she has probably two credit cards, Macy’s and Discover. So who’s really the better borrower? So when FICO algorithms start to penalize you for utilization on credit cards or excessive mortgages or things of this nature and that drives down the FICO rate that’s something we look at. So I will consider a FICO of less than 660, but it must be a utilization factor. In other words, it must be because you’re doing a lot of commerce and that’s what’s striving down the FICO. We are not a subprime lender and we don’t want to be a subprime lender. I started in this business doing hard money subprime loans. It was very, very problematic. Very problematic. Working with subprime or non-prime borrowers was very, very detrimental to us. It’s something I don’t care to go back to a lot of litigation, a lot of F-bombs on the phone and a lot of defaults. So, I just don’t wanna work with that category. And I would share with you that I don’t think you or I have ever seen a subprime hard money lender at any of our conferences scale. It’s just not a scalable business model. Because there’s not enough yield in it to lend to that group of people. So 660 is our minimum. FICO, we will go below that, no question about it. But it has to be for a reason of utilization because if you get into negative derogatory, you’re not paying your water bill and you’re not paying your credit card, the last thing I wanna do is give you $500,000 and then have to chase around for that.