“Fix & Flip” Market Update
August 25, 2015 |
Written by Alan Langston
Executive Director, Arizona Real Estate Investors Association
The “fix & flip” market is an important one to every community and in every market cycle. Investors add value to a real estate transaction through the rehab of a property and then selling at or near “retail” for a profit. If you are the investor or any of the numerous service providers who are necessary to complete a fix & flip project, then you are contributing to a very important segment of the housing market.
The fix & flip market in Maricopa County currently accounts for approximately 5% of the total home sales volume; the market for the entire country is running at about 4% (using data from RealtyTrac®). Comparatively speaking, our local fix & flip market is healthy – this is especially true when considering a variance in the methodology used by RealtyTrac® and the W. P. Carey School of Business at Arizona State University, Center for Real Estate Theory and Practice – which would effectively lower the RealtyTrac® number.
For 2014, there were 4,483 fix & flips sold in Maricopa County. The Arizona Real Estate Investors Association (AZREIA) very conservatively estimates 2014 sales to have reached approximately $880M – generating about $112M or a 16% profit margin overall. The cash-on-cash return was approximately 47% in 2014, on average, assuming financing of 70% of the After Repair Value (although returns would be considerably higher for accomplished investors).
Fix & flip sales volume has been on a decline for several years. While we have seen a leveling off in 2015, sales volume is down 8% compared to 2014 from January through May. At the same time, home sale prices are increasing compared to 2014 by about 9%. Taking into account the slightly down sales volume with higher sales prices indicates the Maricopa County fix & flip market is producing close to the same return as 2014.
A very positive development expanded the “sweet spot” of the fix & flip market. With home sales over $200K now representing over 60% of the resale market, fix & flip investors are successfully moving up the price scale. It is safe to say that investors are now aggressively pursuing basic rehabs up to $300K and beyond as sales over $300 represent nearly 30% of the resale market.
People who invest in rehabs in the $300K and beyond market segment should do so carefully. While you can’t predict price with any certainty, indicators on pricing will stay the same or drop slightly in the fall. If this is accurate, then more care must be taken when purchasing a property to be rehabbed over the next few months – any price deterioration will have a negative impact on the investor’s profit margin.
Sources: ARMLS®, RealtyTrac®, W.P. Carey School of Business.