Flips purchased with financing rise to 9.5-year high
Housing analysts have recently expressed caution about the residential real estate investment market due to rising home prices and competition. But, investors continue to find deals and set records while increasingly tapping the debt markets to finance their flips.
Home flipping set a record during the first quarter of 2018 when homes flipped sold at an average gross profit of $69,500—the highest average gross flipping profit since first quarter 2000 (when ATTOM Data Solutions began tracking flips). Average gross profits were up 4.8 percent from $66,287 in the year-ago period.
The percentage of flipped homes purchased with financing this quarter reached its highest point in nearly 10 years. Homes purchased with financing and then flipped represented 35.7 percent of all homes flipped during the quarter, up from 33.5 percent a year ago and the highest level since third quarter 2008.
Why Financing is on the Rise
The number of lenders catering to the fix-and-flip market has expanded from the traditional hard-money lenders of yesteryear, a potential factor contributing to the rise in financing for flips. This new breed of lender is often found online, where borrowers get introduced to lending platforms that use sophisticated algorithms to determine if a potential borrower is a good credit risk. These technologically advanced online lending platforms have enhanced the speed and availability of financing, while also compressing the rates, a virtual “hat trick” for borrowers.
“We are seeing a lot of emerging lenders in this fix-flip space that are well capitalized and have deep pockets backing them, ready to lend money,” said Daren Blomquist, senior vice president at real estate data company ATTOM Data Solutions. “There is a lot of capital chasing the returns that lenders can get on home flipping deals, and also technology has played a big role compared to 10 years ago during the housing boom.”
Many of these new lenders are digital and national, making it easier for real estate flippers to access financing no matter where they are based. The new lenders in the space have made financing more competitive, leading to better interest rates for real estate investors seeking financing for their deals.
“I think another piece is that as (home) prices are rising, flippers are more in need of financing,” Blomquist said.
Metros Where Financing is Highest
Of the 136 metro areas analyzed, 61 (45 percent) posted a year-over-year increase in their home flipping rate in the first quarter, led by Baton Rouge, Louisiana (up 70 percent); Lincoln, Nebraska (up 62 percent); Madison, Wisconsin (up 55 percent); Columbia, South Carolina (up 48 percent); and Atlantic City, New Jersey (up 43 percent).
Baton Rouge is experiencing a ripple effect from catastrophic flooding that occurred there in August 2016. As these flooded homes went into foreclosure or were put up for sale, flippers came into the
market to buy them at distressed prices and are now flipping them for profits.
Natural disasters provide an opportunity for real estate investors to buy housing economically and flip it for profit while improving severely damaged neighborhoods in the process. There’s typically a delay in seeing these flipping numbers show up in property data.
Houston, which was devastated by Hurricane Harvey during August and September 2017, is an example of this trend. Flipping in Houston was down in the first quarter, according to ATTOM Data Solutions statistics, because of the time it takes to acquire, renovate and then flip a home. Blomquist, however, believes flipping numbers likely will rise in Houston before long. Miami is another large market that saw a double-digit decline in flips in the first quarter. The downturn could be related, in part, to damage from hurricanes Irma and Maria last fall and the delay that results in acquiring and renovating damaged property.
Further up the coast, Atlantic City, New Jersey, saw its flipping rate increase by 43 percent in the first quarter. Atlantic City is an interesting city to observe what is happening in terms of residential real estate investment. The city has struggled economically and has a high foreclosure rate, which likely is providing an opportunity for real estate investors to buy at distressed prices.
A Look Toward the Future
What does the future portend for fix and flip investors and the lenders that finance their deals?
Just as lenders have evolved since the housing crisis, so too have real estate investors. Blomquist notes that some real estate investors who were flipping homes have decided to move into new home construction. An example is Alex Sifakis. He’s the president of JWB Real Estate Capital, a real estate investment company based in Jacksonville, Florida, where the home flipping rate is down 7 percent compared to a year ago.
The company told ATTOM Data that it expects to flip about 200 homes this year but will build about 400. The majority will be in older neighborhoods where the company is buying teardowns or vacant lots.
This evolution is creating new opportunities for lenders who have been lending to the fix and flip market and are now open to lending on new construction. As flippers move into new construction, it’s advantageous for experienced borrowers to be able to rely on the same lender to finance new construction as well as their fix and flip deals.
Areas to Watch
The report showed that total flips were down 3 percent from a year ago to a two-year low, but the decline could be attributed to dwindling inventory.
The return on investment also dipped in the first quarter. The average gross flipping profit of $69,500 in first quarter 2018 translated into an average 47.8 percent return on investment compared to the original acquisition price. That’s down from 50.3 percent in first quarter 2017 to the lowest level since second quarter 2015—a nearly three-year low. This decline could have to do with rising home prices.
The number of entities flipping properties in first quarter 2018 dropped to 37,873 entities from a 10-year high in second quarter 2017 when nearly 45,000 entities were flipping. Tight inventory is likely a key reason for the recent decline, but there is a trend toward operators who can effectively manage multiple flips at a lower cost per flip and, therefore, can stay profitable at a lower gross profit per flip.
Going forward, we expect to continue to see rate compression making the cost of financing flips more favorable to all-cash deals and experienced flippers moving into the new construction arena.