Flipping a home in today's market is difficult, and many investors are pulling away. However, there are some eager and aggressive investors who continue to scout out vacant and dilapidated properties. When they're done, they put the newly renovated, turnkey inventory back on the market, making a handsome profit.
Properties that investors resell and put back on the market are priced at 30 to 40 percent less than new construction, according to data from New Western, a national real estate investment firm. “Investors want to make money, but their interests are aligned with the community,” says Kurt Carlton, president of New Western. “Most of the resale properties are vacant, unused inventory being transformed into net-plus-one housing units. When supply comes back, housing prices become more affordable.”
Vacant homes or homes in need of major repairs are unattractive to the average buyer, and with interest rates and inflation rising, many buyers don't have the luxury or money to fix up the home themselves. That's where a band of tenacious investors comes in: They have the capital, skills, and connections to spruce up homes and resell them.
“Most of these resale properties are vacant and are turning unused inventory into plus-one net residential units. When supply comes back, housing prices will become more affordable.”
– Kurt Carlton, President, New Western
Luke Wischmeyer is one such investor. He flips houses all along the East Coast, from West Virginia to Florida. He says he's flipped houses that were in terrible condition, including one recently in Florida that was completely flooded. His average profit varies by market and type of property, and he says there aren't many deals available in the current market. But rather than jumping into any deal, Wischmeyer is picky and waits for the best opportunity to present itself.
“The wholesalers know what I want, and they send me the deals,” Mr. Wischmeyer says. He acknowledges that other homebuyers may want the properties he picks, but they often don't have access to the kind of financing available to Mr. Wischmeyer. He has funded many of his deals through private lenders over the years. One of his lending partners, Christian Grooms of Lima One Capital, says Mr. Wischmeyer is wise to pick deals that maximize his return on investment (ROI).
“On our side, we're seeing a decline in deal volume, but on the other hand, we're seeing people just doing deals just to do deals,” Grooms said. “If you're just doing deals just to do deals, you're likely to fail.”
Nationwide, remodeling is becoming an increasing share of total home sales. According to Atom data, 9% of all U.S. home sales in Q1 2023 were remodels, up from 8% in Q4 2022 and well above the 5.9% figure for all of 2021. However, despite the rising percentage, the number of homes being remodeled has fallen from about 115,000 in Q1 2022 to 73,000 in Q1 2023.
Resale gross profits also rose slightly in the first quarter of 2023. Atom reported an average profit of $56,000 per home and an ROI of 22.5%, up from 21.7% in the fourth quarter of 2022. Profits have fallen significantly over the past two years as home prices have soared, and Atom CEO Rob Barber said that an ROI in the 20% range “is easily wiped out by costs like renovations, mortgage payments and property taxes.” But the increase in profits earlier this year is the first sign of a market recovery.
Barber says investors are realizing the best returns in the lowest priced markets, where the typical purchase price is under $150,000. “These markets had the smallest dollar gains — most under $80,000 — but the highest profit margins,” he says. “In that lower price range, nearly all markets had profit margins above 30 percent, and about half had profit margins above 50 percent.”
Carlton believes that remodeling and flipping opportunities will soon explode as the U.S. enters what he calls the “Great Renovation” period. Homes that are 20 to 40 years old are reaching the point where they will need their first major overhaul, and millions of homes built in the 1980s, '90s and early 2000s are reaching this milestone. Carlton says that by 2027, 24 million homes will be due for a major renovation. “This is a problem that investors are solving,” he says. “You're going to see more people get into home flipping because there's more demand.”
Rising foreclosure rates could also provide investment opportunities, as they increase the supply of homes in less-than-ideal conditions. But foreclosure activity has slowed significantly in recent months, Barber said, noting that Attom's 1H 2023 Foreclosure Report showed foreclosures were up just 13% year over year. “Opportunities are down, but they're still up compared to two years ago when COVID-related foreclosure bans were first lifted,” Barber said.
Grooms said deals for foreclosures are approved on a case-by-case basis for both investors and lenders, depending on the situation and price point. “In certain scenarios, we may be able to offer deals to investors, but we have to be very careful,” he said. “Right now, it’s all about relationships to find more opportunities.”
While the data is mixed, Carlton said investor sentiment remains positive, with 80% of New Western investors selling their homes for above asking price after resale. “We've dug pretty deep and our surveys have shown investors are bullish,” Carlton said. “The market is trending up right now and the markets that have had the biggest (price) corrections are recovering.”