A Loan Officer's Perspective on Financing Philadelphia's Rowhome Rebuild

Two vacant rowhomes at 4229 Romain Street and 119 South Redfield Street are now two beautiful homes where people can live. A small local builder, AID Solutions LLC, put months of labor into both so the homes could be leased. The owners then came to me for help securing the long term capital they needed to recover their investment and start the next project.

The Federal Reserve Bank of Philadelphia puts the home repair backlog across the metro at roughly $3.7 billion. That is what you would expect in a city whose median home was built in 1949, the oldest housing stock of any large county in Pennsylvania. Mayor Parker's H.O.M.E. plan commits about $2 billion toward 30,000 units. There is no version of closing that gap that does not run through local operators like AID Solutions.

Recent ATTOM data puts the median time from purchase to resale on a flip at 165 days, up from 160 days the quarter before. The number of homes flipped nationally fell to roughly 64,300 in the first quarter of the year from about 70,600 a year earlier. Redfin reported a median of 49 days to sell entering the summer, four days longer than the year before. An investor survey from RCN Capital and CJ Patrick found the largest share of investors calling conditions worse in the survey's three year history.

Every extra week on the market is carrying cost that the builder pays out of pocket: interest, taxes, insurance, and utilities on a house earning nothing. On a typical rowhome project, that can run a few thousand dollars a month. At 165 days, it is real money against a thin margin. If you are buying on your own block, price six months of carrying costs as a separate line item before you write the offer. Find out what the finished unit leases for, not only what it might sell for.

Small developers are doing what AID Solutions did. They rent the finished house and refinance instead of selling into a slow market. A cash out refinance on a stabilized property can return much of the developer's capital while the building and its income stay in local hands. I think this is better for a neighborhood than a house sitting empty.

Underwrite both a sale and a rental

In my experience, it is a good idea to underwrite both a fix and flip and a fix and hold. Months go into the construction budget and minutes go into what the finished unit will lease for. Small real estate developers should consider both scenarios and price them into their projects. Learning that the neighborhood cannot support the rent after the drywall is up is expensive and almost entirely preventable at the design stage, when the budget, finishes, and unit layout are still decisions rather than facts.

Match the renovation to the appraisal

At times, there is a mismatch between craftsmanship and appraised value. Good finishes help a house rent, but appraisers anchor to square footage, bedroom and bathroom count, condition, and recent sales within a few blocks. In a city where neighborhoods can change from one block to the next, this can financially punish the developer who renovates on the weaker block, which is often the block that most needs the work.

One lender's answer does not define the deal

A lender's rejection can leave an investor at risk of losing money when a hard money loan comes due, but it does not have to be this way. A no from one lender on one structure is not a no on the deal. A smaller loan amount, a different payment structure, another lender's treatment of entity ownership, or a few more months of rental history can each change the answer.

Philadelphia's housing stock will be rebuilt one or two houses at a time by people who live here. That takes community lenders who work with local developers and teach them how to invest in their own neighborhoods. Those lenders exist. The Philadelphia Accelerator Fund is a certified community development financial institution that lends on affordable housing in investment areas across the city. Connecting with local community financing institutions is a practical way to learn how to invest in real estate in your own community.