Our average loan size jumped 54% in one quarter. Here is exactly what that signals.

PHOENIX MARKET SHIFT

I am seeing something in the Phoenix fix-and-flip market worth your attention.

Over the past 90 days, the average loan size at 42 Solutions jumped from $470K to $725K. That is a 54% increase in a single quarter.

This is not random. It reflects a fundamental shift in how experienced operators are responding to current market conditions — and it tells you something important about where risk and opportunity sit right now in Arizona real estate.

THE COMPRESSION AT THE LOWER END

In 2021 to 2022, a typical sub-$500K flip in Phoenix looked like this: buy at $250K, invest $50K in rehab, sell at $450K. All-in cost of $300K, profit of $150K. Even after holding costs and transaction fees, operators cleared $100K or more. That was a 50% gross margin with significant room for error.

Today, that same deal profile has changed considerably.

Purchase prices are up 10 to 15%. Labor and materials are up 20 to 30%. Days on market have extended from the mid-50s to 66 to 74 days metro-wide, which increases carry costs meaningfully. The result: all-in costs have risen to roughly $370K, ARVs have grown only modestly to around $475K, and net profit after fees has compressed to $60K to $70K.

That is a 40% decline in absolute profit for the same capital deployment, execution risk, and amount of work.

Meanwhile, operators with the liquidity and experience to move into the $700K to $900K range are finding better risk-adjusted returns. A typical deal at this price point — purchase at $550K, invest $100K in rehab, sell at $875K — nets $120K to $140K after fees.

Same margin percentage. Double the absolute profit. And significantly more buffer to absorb extended hold times or cost overruns without eroding the return.

WHY LIQUIDITY IS THE CONSTRAINT

Not every operator can make this shift. Moving upmarket requires two things: experience managing larger projects without budget overruns, and the liquidity to weather extended hold periods.

Here is the math on carry costs. A $450K property sitting on market for 90 days incurs roughly $7,200 in interest, taxes, insurance, and utilities. An $800K property sitting for the same period incurs around $12,900.

But the $800K deal started with $185K in gross profit. The $450K deal started with $105K. If both properties run 60 days past the planned exit, the smaller deal loses half its profit margin. The larger deal stays comfortably profitable.

This is why operators without $80K to $150K in reserves are staying in the sub-$600K range. They cannot absorb the extended carry risk. Operators with strong balance sheets are moving capital to where the margin for error is wider. That is rational, not speculative.

WHAT THIS TELLS US ABOUT THE MARKET

Phoenix inventory is up 39% year over year. Days on market have increased roughly 20%. This is not a distressed market, but it is no longer a seller's market. Properties require accurate pricing and realistic hold time assumptions.

The sub-$600K segment has become highly competitive. Dozens of operators chasing the same deals compresses acquisition margins and forces aggressive underwriting. The $700K to $900K segment has fewer participants because most operators lack the liquidity to operate there. Less competition, wider margins, more room to price conservatively and still exit profitably.

From a credit perspective, this dynamic favors lenders and investors backing experienced, well-capitalized operators. These borrowers can absorb volatility without distress. They price to sell, not to test the market. They have contractor relationships that prevent scope creep. They understand that today's market rewards discipline over optimism.

WHAT THIS MEANS FOR PRIVATE CREDIT INVESTORS

If you are allocating capital to Arizona fix-and-flip loans, operator selection matters more now than it did two years ago. The margin for error has shrunk. Inexperienced operators without reserves will struggle in this environment. Experienced, well-capitalized operators will continue to perform.

We are seeing this in our own loan book. The operators moving upmarket are the same ones who have performed consistently across multiple cycles. They know which neighborhoods in the East Valley move faster than the West Valley. They price ARVs off sold comps from the last 90 days, not Zillow estimates or 2021 peak pricing.

These are the operators we lend to. And this is the borrower profile that should anchor a conservative private credit allocation in the current environment.

THE BROADER TAKEAWAY

Markets adapt. Capital flows to where risk-adjusted returns are most favorable.

Right now in Phoenix, that means experienced operators with strong balance sheets are moving upmarket — where absolute profit is higher and the margin for error is wider. This is not a warning sign. It is rational capital allocation.

The operators making this shift are not chasing yield. They are protecting downside while maintaining acceptable returns. As a lender, that is exactly who I want to finance. As a private credit investor, that is the profile you want exposure to.

If you want to discuss how this dynamic plays out in first-position lending — or explore what a conservative Arizona private credit allocation looks like right now — reply to this email or join us at the next Office Hours call.

Devon

P.S. This shift is specific to Phoenix, but the underlying principle applies broadly. When margins compress, capital flows to where buffer exists. Watch for similar dynamics in other Sunbelt markets over the next 12 to 18 months.

Sonnet 4.6

Claude is AI and can make mistakes. Please double-check responses.