Fix-N-Flip: A National Perspective
July 7, 2017
Chief Operating Officer, National Real Estate Investors Association
Fix and Flips have gone mainstream nationwide. In fact, the HGTV crowd has spawned a new wave of weekend warriors. Couples are wading into real estate repair. After all, how hard can it be? Not to be too cynical, but I’m waiting for the records to come out on the increased likelihood of divorce during and after the first flip. At the same time, fix and flips are doing well across the country. With rents holding steady and still increasing as affordability goes up.
After years of recession, the vast majority of the country is in an interesting position for fix and flippers. We have a tighter housing market with fewer people selling and turning to renovating their own homes instead. The late-to-the-party Millennials are finally starting to show up as buyers. New construction of single family homes is trailing demand and in many areas declining. The reason for the decline are numerous including the need for larger down payments, higher overall cost of new housing, tighter credit standards and the perception that the new home in the fairly sprawled out suburb is just too far out. Investors are in the unique position of providing a product with increasing demand. Often this demand is focused on starter homes, but also provides the bridge to modernity for those larger houses that have not been updated and therefore lack attention from the home-buying public. The customization and capital investment offered by investors provide a market repositioning for undervalued and overlooked properties – and pay for the results.
The benefits for the fix and flip market are spelled out in black and white, or more precisely green. ATTOM Data Solutions 2016 Year-End U.S. Home Flipping Report shows the top ten states for highest ROI on a flip are: Pennsylvania, Ohio, Louisiana, Maryland, Illinois, Oklahoma, Connecticut, Tennessee, Kentucky, and New Jersey. Returns on investments for these states exceed 70 percent and gross profits ranging from $50k-$100K for a single flip – the draw can be enticing. There are many strategies to consider to capitalize from the current market.
Blighted urban communities are a good target strategy in the current flip market. Fix and flip pioneers first entered into these communities; however, it takes more than a little stamina to achieve a lucrative return. A community redevelopment typically doesn’t happen in a single year. Further, the gentrifying spread can be very beneficial – especially to those rehabbers that are tuned into new and future developments in communities where some of the largest gains can be found, as an area or street improves. One benefit for groups of rehabbers is when four or five start working on different houses on the same street within blocks of each other. The level for achieving critical mass is different in each community, but the threshold is often lower than most people might think.
One of the main feeders for the renovation crowd has always been foreclosures and sheriff sales. With delinquencies falling and FHA delinquencies falling to 1997 lows, there are fewer homes for sale. With the value increase in housing and the addition of new people, and their money, the smaller inventory for purchase has driven out some long time rehabbers. In Denver, several residents were surprised to receive checks back from the county after their home was substantially bid-up during the sheriff sale. Not only was the mortgage covered, the legal fees were covered and the surplus returned to the owner. This seems to present an open opportunity for enterprising individuals to reach out to those owners of property headed to sheriff sale and run the numbers for a straight sale – the bank usually won’t move on a short sale with the foreclosure in sight.
With the property purchase equation shifting, many long time fix and flippers are also using various methods to find leads. Examples include the old tried and true method of driving neighborhoods, follow up on probate and nursing home moves or mass mailing campaigns. For those who have been around a while, these methods are reminders of the years 2005 to 2007. Which brings up the question of a bubble.
Add to that the complication of a potential new tax reform specifically impacting businesses and real estate, in a world that has been flooding the U.S. with funds due to U.S. economic stability – we could be ready for the long expected echo recession. It may be short and minimal, but when it happens, cash will be king and the fix and flip opportunities will be more numerous for the prepared rehabber.
Deals that are not too skinny with a short turn around, may be the best strategy in some areas across the country as we move toward an interesting second half of 2017. For perspective, ATTOM Data’s report reveals that only half as many people are “flipping” compared to the peak season of 2005 to 2006. This lessens the competitive factor making room for the flipping boom to run – just make sure to have your finger on the pulse in your community.