The Scotsman Guide - Victor Whitman - 13 March 2017
Home flippers were busy last year buying, rehabbing and quickly re-selling properties. Home flipping has been steadily increasing as a business since hitting bottom in 2010, but today’s market shouldn’t be confused with the one that overheated and crashed a decade ago, market watchers told Scotsman Guide News.
“Last time, it was inexperienced investors buying condos and other types of second houses outside of their markets purely betting purely on price appreciation of the property,” said Matthew Neisser, chief operating officer for Boca Raton, Forida-based LendingOne, one of several private lenders that are now financing home flips across the U.S.
“This time, at least with the borrowers that we are dealing with, they are not betting on that. They are buying the property at some type of discount to start, doing anywhere between $20,000 and $100,000 in renovations on an average deal, and redoing the property.”
With home sales and prices rising, more people have jumped into the game of home flipping, according to Attom Data Solutions, which tracks sales activity in roughly 80 percent of the U.S. markets.
Last year, flippers completed 193,009 home flips, which was up 3.1 percent and the most sales since 2006. The share of home flips has risen to 5.7 percent of all home sales, which exceeds the level recorded during the period of2000 to 2004. These figures pale in comparison to the last boom in flipping, however. At its peak in 2005, there were 338,207 home flips in the markets that Attom Data Solutions tracks, accountingfor 8.2 percent of all sales.
Gross profits were also strong last year. Flippers realized an average gross profit of $62,624 above the median sales price of $127,276, Attom reported.
Lenders say the volume of financed flips has been rising.
“I think it is the combination of rising home prices and low supply,” said Nav Athwal, founder and chief executive officer of the San Francisco-based RealtyShares, an online investment platform that finances fix-and-flip projects.
“When you are flipping, you really want to be flipping in an up market,” Athwal said. “As prices are going up, there are more opportunities for flippers to take distressed inventories in need of rehab, put some work into it, flip it.”
Tight inventories have made it more challenging in markets like Los Angeles and San Francisco, however. In high-cost cities on the West and East coasts, Athwal said, flippers have tended to purchase undervalued lots and have done total tear-downs. In places like Chicago and Tampa, Florida, however, there are still numerous properties that can be rehabbed and flipped for a profit.
Moving away from high-cost cities
According to Attom’s data, home flippers also were moving away from the highest-cost cities into smaller markets. Of cities with populations of one million, Memphis, Tennessee, had the highest flipping rate at 11.7 percent of all home sales, followed by Tampa/St. Petersburg at 9.9 percent, and Las Vegas at 9.2 percent.
“The easy part of flipping these days is selling the property. The hard part is buying it,” said Daren Blomquist, senior vice president with Attom Data Solutions.
“When we talk to flippers, the buzzword for them is to find inventory that is off-market,” Blomquist said. “A flipper told me the other day, ‘I don’t even look on the MLS (Multiple Listing Service). That is a nonstarter for me because that is where everyone else is looking.’” Although foreclosure and short-sale offerings are waning nationwide, Blomquist said 43 percent of the homes purchased by flippers last year were bought in foreclosure or were bank-owned.
“That is still a major source of inventory for them,” Blomquist said. “But, in addition to that, they are proactively going to homeowners who they think may want to sell but before they have decided to list, reaching out to those homeowners.”
Flippers tend to be smaller-time operators who do less than a dozen properties a year. A total of 126,256 companies or individuals completed these deals last year, the highest number since 2007. Blomquist said flipping is still a majority all-cash business, but just under a third of all purchases are now being financed by lenders. Roughly $12 billion was financed of $38 billion in flipping deals, a nine-year high for financing.
“There are a growing number being financed, and there is a growing number of companies that are not your father’s hard-money lenders,” Blomquist said. “These are start-up, tech-grounded companies that are creating online lending platforms specifically for flippers, which is very interesting. They see there is a lot of money to be made in that.”
Lenders described the flipping business as less purely speculative than the market a decade ago. The collapse on subprime lending and tougher underwriting for mortgages have also put a check on the end buyers of these properties.
Neisser said his company typically does business only with experienced flippers, or people with a solid business background. He’s wary of people with little or no experience who have attended one of the many get-rich-quick seminars that have proliferated around the flippingbusiness.
“Those are the only people who really scare me in the market,” Neisser said.