Flipping Phoenix: What Investors Need to Know Today

Sarah Kirsch Richardson

Principal/Designated Broker, Tru Realty

Having lived and flipped through the post-2008 market crash, I can say that the fix-and-flip market has evolved. Looking back to 2010, the flood of housing inventory allowed investors to acquire properties at a fraction of their current values, and the cost of both labor and material was reasonable. In many cases, a straight cash deal would yield returns of 40 percent without too much effort. This made many investors quite wealthy and spoiled at the same time.

Unfortunately, those days are over.

Phoenix has always had a very healthy fix-and-flip market, and with some areas gentrifying seemingly overnight, it has become somewhat difficult to find a viable fix-and-flip deal in the metro Phoenix market. The demand for a suitable flip is currently at an all-time high!

We are seeing investors acquire assets with only single-digit return potential sight unseen with hard earnest money and no inspection period. The vast majority of deals purchased by investors are sourced by local wholesalers. A reasonable-looking flip will easily sell within a couple hours of being offered by a wholesaler, and will close with cash or a hard money loan typically five days after the contract is executed.

I think three things contribute to the difficulty of finding a fix-and-flip deal in our current marketplace:

1. Investor demand — spurred by the HGTV-fueled illusion that flipping is easy — is at an all-time high.
2. iBuyers like Opendoor, OfferPad, and the soon-to-be Zillow Instant Offers are squeezing local wholesalers and acquiring homes for much skinnier rates of return, leaving only homes in the poorest of condition in their wake. Homes like this require huge rehabilitation budgets that many newer investors cannot take on.
3. Our market is experiencing both a labor shortage and an increase in material costs. What was once a $30,000 rehab in 2010 is now easily $38,000 or more depending on the scope of work, and that’s assuming one can find tradesmen who do quality work and manage to keep them on the job for a reasonable rate.

Though it seems I’ve painted a gloomy picture thus far, there is still opportunity and profit to be made in our market. Investors just need to be incredibly organized, have an eye for design, and be able to stay within their desired budget. Novice flippers in Phoenix may want to consider the following before jumping in feet first:

Understanding the market in which you are considering taking on a flip is crucial. Every submarket in metro Phoenix hosts different consumer demands and finished product. Also, it helps to know how to properly comp a property. Finding a trustworthy real estate agent is always suggested — especially a real estate agent who understands investing.

A wholesaler’s main goal is to sell properties. Wholesalers provide an amazing service, but in many cases their proposed costs of rehab are light and after-repair value is inflated.

Know your labor and material costs BEFORE you start flipping. In many cases, pricing is much higher than you think, and profits have the potential to get eaten up very quickly with single-digit returns.