Home flipping is often romanticized and overly fictionalized, especially on shows like HGTV's Flip or Flop and Good Bones. This sensationalized trend has brought newcomers and investors into the industry eager to make a profit. Behind the spotlight, the current housing market is putting a damper on many of those dreaming of flipping.
In 2021, home resales hit an all-time high, up more than 25% from 2020, despite the slowdown in construction at the beginning of the pandemic. ATTOM reported in February this year that more people are reselling homes, but the profits are falling. In parallel with the ATTOM report, National Mortgage Professional also reported in December 2021 that home resale profits had fallen to their lowest point, despite resale rates increasing in 99 metropolitan areas between 2020 and 2021. Even CoreLogic said that at the end of June, home resale rates were at their highest since 2000. These volatile figures, fluctuating between an increase in the number of projects and a decrease in profits, are affecting real estate investors' confidence in the market and whether these resales will be profitable.
Despite declining profits and a riskier market, savvy investors are still interested in home flip projects, says Christopher Shirley, a mortgage banker at Blue Chip Commercial. “Given the current inflation rate, supply chain issues, material costs and rising interest rates, there are fewer qualified buyers and overall profit margins are significantly lower, despite demand for inventory,” Shirley says.
But Shirley said that while the housing shortage and rising home prices will cause turmoil in the market, the resale market will only use this to its advantage. He suggested the market will soon get aggressive, saying, “Resales will continue as they have in past economic cycles.” [but] Current homeowners will be less likely to sell, and given the lack of inventory, the resale market will likely be stronger.”
A perfect bull storm
Shirley says the current state of the property resale market is comparable to Darwin's infamous “survival of the fittest,” with Wall Street-backed funds boosting the rental market, which in turn is squeezing out less experienced property resellers.
“Investors who have not experienced major market cycle changes will be more hesitant about the uncertain path, as has happened since 2008. More experienced investors will see the market as an opportunity,” he said.
CJ Russell, president of Aureus Finance Group, said the main factor behind the decline in resale profits is rising acquisition costs due to a lack of supply of existing homes for sale.
Global supply chain challenges and widespread construction labor shortages.
Labor shortages in the construction industry are not new, Russell explained, adding: “Experienced operators have built strong teams and significant networks in their local areas to mitigate this risk. Our borrowers generally have access to labor, but the cost of labor is increasing, especially in certain industries. This trend typically impacts profit margins and not project completion.”
But the market is time sensitive. Russell said capital market volatility is having a huge impact on the real estate industry, alluding to Shirley's assertion that experienced lenders and investors will prevail in the resale market. Russell said rising interest rates have challenged many private lenders, causing some to exit significantly or completely. “It's more important than ever for real estate investors to partner with a trusted debt partner that has the financial strength to weather this storm,” Russell said.
Charles Weinraub, a professional real estate agent and owner of Handsome Home Buyers in Long Island, N.Y., said home prices fell 5% after the last Fed rate hike and he's underwriting homes at a 15% discount compared to the previous rate hike. The current housing market is one of the most competitive he's seen.
Weinraub, who has flipped between 70 and 110 homes a year for more than six years, said he is buying fewer homes for resale due to the market correction and expects that to continue over the next three to six months. “Sellers are still looking for top dollar,” Weinraub said. “But… [I am] If you discount it at 15%, you will lose out to other higher bidders due to institutional financing.”