Lima One Capital sees a niche in lending to real-estate flippers

When banks cut back on real estate lending in the wake of the crash, some discovered opportunity in stepping into the breach.

John S. Warren, founder and CEO of Lima One Capital, is among them.

His Greenville, S.C.-based finance company focuses on lending money at high interest rates to real estate investors, particularly those looking to buy and renovate properties to flip them.

In July, Lima One Capital expanded into South Florida as a so-called hard-money lender to real estate investors looking for short-term financing. The company expects to open an office in Aventura this week.

Warren acknowledges his segment of lending has attracted shady players who prey on borrowers. He sees opportunity in the lack of quality competition.

“I did research and found many of these companies are very unprofessional. They’re poorly capitalized. They charge exorbitant fees and interest rates and junk fees,’’ Warren said. “I said ‘This is the best kind of competition to have.’ I felt like there was no competition from a professional standpoint.’’

Warren, a Marine Corps veteran who received an award for valor in Iraq, started the company in February 2010. He began, he said, with just $1 million in capital that someone agreed to provide him and made nine loans that were all repaid.

He next raised about $2 million in capital through an unregistered private debt offering and deployed that into more real-estate loans. “I had a lot more business than I had money,’’ Warren says.

As the company grew, he brought in a silent equity partner, who owns a minority stake.

Since building a track record in lending and showing his business model can work, Warren said he has been able to tap institutional investors in New York, typically hedge funds that are seeking high yields, to provide capital on a larger scale.

“We’ve been able to raise almost unlimited funds from New York,’’ Warren said. He wouldn’t disclose his cost of funds.

In 2013, Lima originated more than $50 million in loans, he said. Less than one percent of the mortgages go sour.

Warren sat down for an interview with the Miami Herald and then responded in writing to emailed questions.

Q: What is “hard-money” lending?

A. “Hard money” usually refers to a loan on an investment property from a non-traditional lender or private lender. Unlike many traditional lenders, hard-money lenders base more of their underwriting on the value of the secured asset, as opposed to the detailed intricacies of a borrower’s financial background.

Q: What niche in the lending market is your company targeting?

A: Lima One Capital provides financing to residential real estate investors who are seeking to purchase and rehab non-owner occupied properties in order to flip them for a profit. We provide 80 percent of the capital needed for the purchase and rehab costs associated with the project. This market is very fragmented and lacks the capitalization and professionalism of traditional lending.

Q: How much do you expect to lend in Miami and Florida?

A: Over the next two years, our analysis shows that we should lend $41 million in the metropolitan Miami area. We plan to lend $110 million throughout Florida in that same two-year period.

Q: South Florida is infamous for financial fraud. Are you prepared to deal with that?

A: Florida definitely has more fraud. We think we have the systems in place to mitigate those scams. We want to deal with really solid creditworthy borrowers.

Q: Who are your typical borrowers?

A: Clients usually fall into one of three categories: A seasoned, full-time real estate investor. An experienced builder or contractor. A middle or upper-class professional who sees real estate investing as a way to create additional income or create long-term wealth.

Some of our clients have one ongoing project at a time. Others have over 25.

Q: Why aren’t commercial banks competing for that business?

A. After the recent financial crisis, most banks were hit with new and burdensome regulations that prevent or limit them from lending on residential properties [that aren’t owner occupied.] The Dodd-Frank Act, the Federal Deposit Insurance Corporation, and Basel III limit a bank’s ability to lend on non-owner occupied homes.

If banks do lend on non-owner occupied homes, they rarely provide financing for the construction portion of the project and they rarely lend on the after-repair value of the home. These factors dramatically reduce the leverage that a real-estate investor can attain from the bank. Banks also cannot close loans quickly.

Q: What big trends in the housing market are affecting your business?

A: Home prices in Florida are below their peak in 2007. Furthermore, Florida currently has the second highest foreclosure inventory in the country. These factors indicate tremendous opportunity for residential real estate investors in Florida to make sizable profits in the next couple of years in acquiring homes, rehabbing them, and flipping them for a profit.

Because Florida is a judicial foreclosure state, its overall housing cycle is about one and a half to two years behind other markets such as Atlanta in conducting foreclosures and liquidating the [repossessed] properties. With the high number of foreclosures, investors will be able to acquire [repossessed properties] or short-sales at below market value. They then will be able to make upgrades to the property and sell it for a substantial profit to homebuyers looking for good deals before interest rates go up. These investors will need or want financing on these purchases and rehabs, and there will be an increase in the number of hard-money loans in Florida over the next several years.

Q: Investors have pulled back on buying houses for rental. So where do you see demand for your loans going forward?

A: Investors have pulled back on buying rental properties, because home prices have risen and rental rates have stagnated. As home prices continue to rise, real estate investors will increase their purchasing of properties for flips. This will increase the demand for our loans in the next couple of years.

Q: What made you decide to expand to Florida and to Miami in particular?

A: As we began to contemplate expansion opportunities, many of our current clients and potential clients asked us to consider expanding to Florida because of the many opportunities for residential real estate investors throughout the state.

We conducted a thorough analysis [of U.S. markets.] Key indicators such as foreclosure sales, number of flips, flips as a percentage of home sales and profitability of flips were very high throughout Florida, and especially in Miami.

Our research indicates that if investors in the Miami market have the needed capital to purchase and rehab investment properties, then Miami will become the largest market on the East Coast for residential real estate investors. Additional research indicated a strong need for a fully capitalized and professional hard-money lender, and we launched to Miami in July of 2014.

Q: What interest rates do you lend at? Why would an investor pay those relatively high rates?

A: We charge a 3.5-percent origination fee and a 12-percent interest rate. Although this is very high compared to traditional mortgage rates, it is one of the lowest rates for hard-money lenders on the East Coast. We provide 80 percent of the capital for both the purchase and the rehab costs, which allows our clients the ability to purchase more properties, thereby increasing their overall return on investment.

Name: John S. Warren

Age: 35

Title: Founder and CEO of Lima One Capital LLC

Business: Lending to real estate investors

Employees: 17 currently; hiring six people for business development

Offices: Greenville, S.C., headquarters; Atlanta; Orlando; Charlotte, N.C.; Washington, D.C.; Aventura, Fla., (opens this week.)

Florida plans: Expects to lend $41 million in the Miami metro area and $110 million in Florida in the next two years.