Lending in high-growth metros is familiar terrain. But as yields compress in primary markets, savvy lenders are looking to secondary and tertiary cities — where the competition is lower, margins can be wider, and real estate is still affordable.
But with opportunity comes risk.
How do you lend safely in places most investors overlook?
Here’s what we’ve learned after funding deals in both the hot zones and the hidden gems.
Understand the Market Tier First
Primary markets (like New York, LA, Chicago) have high demand, consistent liquidity, and large institutional presence.
Secondary markets (like Indianapolis, Nashville, or Kansas City) are mid-sized metros with strong economies but less saturation.
Tertiary markets (like Gary, Indiana or Macon, Georgia) are smaller cities or towns with less liquidity and slower appreciation — but often more room for upside.
You can lend in all three — but your underwriting must adjust with the terrain.
1. Vet the Borrower Even Harder
In smaller markets, the borrower becomes an even more critical part of the deal. You’re not just betting on the asset — you’re betting on their plan, their ability to execute, and their boots-on-the-ground presence.
Ask:
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Do they live near the market or have a local team?
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Do they have experience in similar neighborhoods?
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Are they operating with licensed contractors or DIYing?
In low-volume areas, if the borrower disappears, so does your exit strategy.
2. Go Deeper on Your Comps
Zillow isn’t enough. Neither is just “checking the ARV.”
Smaller markets often have less turnover, fewer recent sales, and inflated listings. That means comps can be misleading — or nonexistent.
You need multiple sources (MLS, PropStream, agent feedback, even tax records), in-person insight from a local realtor or appraiser, and adjustments for market seasonality and time on market. Always assume a longer sell timeline — and shave 5–10% off optimistic ARVs to be safe.
3. Review Days on Market and Inventory Levels
In tertiary areas, a property can sit — even if it’s priced well and rehabbed beautifully. This isn’t HGTV.
Ask:
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What’s the average Days on Market (DOM)?
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Are buyers mainly owner-occupants or investors?
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Is there a backlog of similar inventory?
If inventory is high or stagnant, your borrower might have to discount aggressively to exit — and your capital could be tied up longer than expected.
4. Be Conservative with Loan-to-Value
In major metros, lenders often push LTVs to 70%–75%. In smaller markets? That’s a recipe for trouble.
Aim for 65% max LTV for fix-and-flips, 60%–65% ARV depending on the strength of the comp set, and enough spread to allow for a longer hold and possible price drop. The extra equity cushion isn’t just about comfort — it’s your risk buffer when market liquidity dries up.
5. Stress Test the Exit Strategy
What happens if the flip doesn’t sell?
Could it cash flow as a rental? Is there Section 8 demand? Would it work as a mid-term rental?
Encourage borrowers to build in backup plans — and underwrite to the worst-case, not just the best-case. If the exit hinges on perfect timing or a 15% appreciation window, pass.
6. Check Local Lending and Title Norms
Every market plays by different rules. Some small towns still do table funding. Others have unique title quirks, high transfer taxes, or slow municipalities.
Before you fund, connect with a local title company, confirm lien positioning, insurance, and zoning rules, and make sure rehab permits won’t be a surprise delay.
Just because it’s small doesn’t mean it’s simple.
7. Walk (or Video Walk) the Property
Tertiary market flips often have surprises — and you can’t rely on Google Street View from 2014.
Insist on a current video walk-through or photo set from your borrower, visual proof of structural condition, utilities, roof, foundation, etc., and verification of neighborhood conditions (blight, burned-out homes, etc.). Pictures protect principal. Don’t skip the visual inspection.
Final Thoughts: Risk Is Manageable — If You Respect It
Secondary and tertiary markets are full of opportunity, especially for investors and lenders willing to dig deeper. But they demand a different level of diligence.
The good news? You can still lend safely — and profitably — if you vet borrowers like partners, underwrite the deal, the market, and the exit, stay conservative on leverage, and have real boots-on-the-ground insight.
At Conduit Capital, we’ve funded dozens of deals in up-and-coming towns that the big players ignore. Our secret? Smarter diligence, stronger relationships, and lending like real investors — not institutions.
Want help evaluating a deal in a smaller market?
Let’s take a look — together.
