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Dollar Volume of Financed Flips Rises, but Overall Flip Activity Declines

A more challenging fix-and-flip market appears to be emerging via the latest data from ATTOM Data Solutions, but digging into the data shows there are still some significant opportunities for experienced real estate investors.

Interestingly, the total dollar volume of financed home flip purchases in 2018 was $19.9 billion, up 8 percent from $18.5 billion in 2017 — the highest dollar volume since 2007, according to ATTOM Data Solutions.

Home flips purchased by investors using financing remained basically flat at 39.1 percent in 2018, dipping just 0.3 percent from 39.4 percent in 2017. Despite the fact that private money lenders, like Patch of Land, have had an impact on declining mortgage rates making it more affordable to finance flips, we believe dwindling inventory, rising home prices, and a more challenging environment to generate gross profits and returns from flips is driving this stat.

The 207,957 single-family homes and condos flipped in 2018 represents a 4 percent decline from the 216,537 home flips in 2017 as the marketplace for fix-and-flips undergoes some of the same challenges currently facing the broader housing market.

About 5.6 percent of 2018 housing market transactions were flips, about the same as 2017. Flips yielded an average gross profit of $65,000 (the difference between the median purchase price and the median sale price), posting a decline of 3 percent from $66,900 in 2017.

When looking at just the fourth quarter, the share of flips in which the flipper used financing represented 36.4 percent of all homes flipped in the quarter, down from 39.1 percent in the previous quarter and down from 39.5 percent in Q4 2017, which represents a two-year low in the percent of financed flips. The Q4 2018 decline could be related to a run-up of mortgage rates experienced during the quarter, however, since rates have since come back down ATTOM is reporting the total dollar volume of financed home flip purchases in Q1 2019 was up 35 percent to $6.4 billion, the highest level since Q2 2007 — over a 12-year high.

Falling mortgage rates should help

The rates have begun falling again, though, and that should give the home flipping marketplace a boost. Last fall, Realtor.com forecast that mortgage rates would end the year at 5.5 percent, while the MBA estimated that mortgage rates would settle at 5.1 percent. Both of those estimates are likely out of date as the Federal Reserve has since indicated a more patient approach to interest rate hikes this year; mortgage rates began the year by falling off their December highs to about 4 percent on a 30-year, fixed rate as of March 1.

On Feb. 28, Freddie Mac updated its mortgage rate forecast, predicting a 30-year, fixed-rate loan will end the year at 4.6 percent.

The impact of high prices

As prices rise, the financing of flips by investors has risen to over 50 percent of the flipping market in several high-priced metropolitan regions around the country.

Among metros with at least 1 million people, the Denver area had the most flips purchased with financing: 53.7 percent. But several other large metros also climbed to over 50 percent of flips purchased by investors with financing: Providence, Rhode Island (51.8 percent); Seattle (51.8 percent); San Diego (51.6 percent); and San Francisco (50.8 percent).

It will be interesting to see if this trend holds in high-dollar markets as home price increases are expected to moderate this year. Realtor.com, a website of the National Association of Realtors, predicts home prices will rise by just 2.2 percent this year. The Mortgage Bankers Association predicts a 2.8 percent rise in home prices.

Meeting the challenges

The flipping market is certainly becoming more challenging.

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

A more challenging housing market favors experienced real estate investors, and some of first-time flippers seeking “easy money” may be calling it quits. It will be interesting to see if the number of those who are flipping continues to decline.

Profits are also declining slightly. The average gross flipping profit of $65,000 in 2018 represented an average 44.8 percent return on investment (percentage of original purchase price), down from 50.3 percent in 2017, according to ATTOM Data. The all-time high average gross flipping ROI was 51 percent in 2016.

In addition, the number of flips being sold to FHA borrowers, a key market for real estate investors, was down 17 percent last year over 2017.

Opportunities still out there

Still, money is being made. Among metros with a population of at least 200,000 and at least 100 home flips in 2018, those with the highest average gross flipping ROI included three Pennsylvania cities: Pittsburgh (144.2 percent); Scranton (131.7 percent); and Erie (109.3 percent). Also notable: Atlantic City, New Jersey (113.2 percent); and Cleveland (112.1 percent).

Philadelphia, Baltimore, Buffalo, N.Y.; Memphis; and Cincinnati also all had ROIs over 80 percent.

Several markets are still seeing a lot of activity: Among metros with at least 1 million people, these had the highest flipping rates: Memphis (11.7 percent); Phoenix (9.1 percent); Las Vegas (8.7 percent); Tampa-St. Petersburg, Florida, (8.2 percent); and Birmingham, Alabama (7.6 percent).

Other major markets with a significant amount of activity last year included Baltimore; St. Louis; Philadelphia; Orlando; and Nashville.

The good news is that in these markets the return on investment is outpacing national numbers and indicate real opportunities for savvy investors.

pol - infographic - 2019-05-14



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