Opportunity awaits even in a fluctuating fix and flip market

by Ryan Rose23 Sep 2019

Fix and flips are an appealing investment as dollar volume of financed flips increase.

Even though Patch of Land reports that overall fix and flip activity has declined in recent months, the total dollar volume of financed home flip purchasing was up 18% from $18.5 billion in 2017 to $19.9 billion in 2018, the highest dollar volume since 2007 according to a recent study by ATTOM Data Solutions. This indicates that the fix and flip market still has significant opportunities for new and experienced real estate investors as.

While financing by investors changed little from 2017 to 2018 (39.1% to 39.4% respectively), private money lenders have had a positive impact on mortgage rates, helping rates decline and making it more affordable to finance flips. The fact that we are seeing limited inventory, rising home prices, and a more challenging environment to generate profits and returns from flips is driving this stat.

Patch of Land cited a 4% decline in flipped single-family homes and condos in 2018: 207,957 to 216,537 home flips in 2018 versus 2017. Many are facing similar challenges in the broader housing market. Both 2017 and 2018 saw 5.6% of housing market transactions being fix and flips with an average gross profit of $65,000 (the difference between the median purchase price and the median sale price). This is a decline of 3% from $66,900 in 2017.

“The share of flips in which the flipper used financing represented 36.4% of all homes flipped,” according to Patch of Land. This down from 39.1% in the previous quarter and down from 39.5% in the fourth quarter of 2017. This represents a 2-year low in the percent of financed flips.

ATTOM reports the total dollar volume of financed home flips in the first quarter of 2019 was at a 12-year high (up 35% to $6.4 billion).

The good news is that falling mortgage rates should help balance this situation and give the home flipping market a boost. The Federal Reserve initially indicated a more patient approach rate hikes this year, and then reversed course and dropped the rate twice this year, after more than a decade of holding rates steady or raising them.

“As prices rise, the financing of flips by investors has risen to over 50% of the flipping market in several high-priced metropolitan regions around the country,” according to Patch of Land. The impact of these high prices is seen in metros with at least 1 million people. Denver saw 53.7% of flips purchased with financing while other saw similar rates: Providence, R.I. (51.8%), Seattle, Wash (51.8%), San Diego, Calif. (51.6%), and San Franci

Realtor.com, the website of the National Association of Realtors, predicts home prices will rise by 2.2% this year while Mortgage Bankers Association predicts a 2.8% rise in home prices. While this market is becoming more and more challenging, investors must be aware and ready to meet these challenges.

“A total of 146,020 entities (individuals and institutions) flipped homes in 2018, down 0.4 percent from 2017,” according to Patch of Land. “The number of flippers has risen by 63.1 percent over the past 10 years as many first-time HGTV flippers entered the market, and is now starting to fall.”

More challenge means experienced real estate investors and some first-time flippers may call it quits. Will this trend continue where the rate of flipping continues to decline?

Patch of Land indicates that profits are also declining steadily, adding that “the average gross flipping profit of $65,000 in 2018 represented an average of 44.8% return on investment (percentage of original purchase price), down from 50.3% in 2017. The all-time high average gross flipping ROI was 51% in 2016.” The number of flips being sold to FHA borrowers was also down 17% in 2018 from 2017.

Don’t let this fluctuation intimidate you. There are still many opportunities out there and plenty of money to be made.

Metros with a population of at least 200,000, at least 100 home flips in 2018, and have the highest average gross flipping ROI included:

  • Pittsburgh, Pa. (144.2%)
  • Scranton, Pa. (131.7%)
  • Erie, Pa. (109.3%)
  • Atlantic City, N.J. (113.2%)
  • Cleveland, Ohio (112.1%)
  • Philadelphia, Baltimore, Buffalo, N.Y. and Cincinnati, Ohio also had ROIs over 80%

Markets still seeing significant activity:

Among metros with at least 1 million people, these had the highest flipping rates:

Memphis (11.7 %)

  • Phoenix (9.1%)
  • Las Vegas (8.7%)
  • Tampa-St. Petersburg, Florida, (8.2%)
  • Birmingham, Alabama (7.6%).
  • Baltimore, Md., St. Louis, Mo., Philadelphia, Penn., Orlando, Fla., and Nashville, Tenn. also saw significant activity last year

In these markets, the return on investment is outpacing national numbers and indicates that there is still a lot of opportunity for savvy investors—and the brokers who know how to reach them.