How to Foolproof your Fix-and-Flip: Consider Market Climate and Start Smart Investing

Posted by Residential Capital Partners on Aug 11, 2021 4:40:15 PM

Now that we’re less than half a year away from 2022, what do we know so far about 2021? In the last year alone, median values of single-family homes and condos rose more than 10% nationally. This rising surge of new house hunters and a super tight supply of housing inventory was also impacted by an ongoing pandemic. With mortgage rates remarkably low, home buying became an attractive option for many Americans seeking more space, a second home, or a work-from-home office with a better view.

SLIGHT DIP OR REAL DOWNTURN?

Now, halfway into the 10th year in this housing boom, many home investors wonder: will real estate markets flatline or drop? How long will these high prices last? While we can’t see into the future, we have some new data about how 2021 compares so far to prior years, both before and since the housing boom. According to a report from ATTOM, fix-and-flip real estate investments have fallen to the lowest level since 2000. In the first quarter of 2021, the same report cites only one in 37 transactions, or only 2.7% of home sales, were flips. Compare that figure to where we were in the first quarter of 2020: down from 7.5%, or one in 13 sales were categorized as fix-and-flips.

 

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While the flipping rate dropped, so did profits and profit margins. If we examine the profits from that same ATTOM report, the numbers give good reason for pause: the gross profit on the average national housing fix-and-flip (i.e., the difference between median sales price and median price paid by investors) was $70,000 in the fourth quarter of 2020 compared to $63,500 in the first quarter of 2021. However, it’s notable that the fourth quarter figure was still up slightly from $62,000 in the first quarter of last year. Experts stop short of drawing any definitive conclusion from this data. So, we can’t yet say whether this is a sign of temperance in the markets or a slowing trend.

IN SOME AREAS, A SILVER LINING

The drop in the rate of gross return on investment for a flip was down to 41.8% in the fourth quarter of 2020, a figure comparable to the lowest ROI back in the second quarter of 2011.

And while house flipping was down in certain regions among 70% of U.S. markets, there has been an uptick in other regions. According to data, the regions which saw the biggest increases in home-flipping rate were in Boston, MA (up 79%), Springfield, MA (up 114%), Albuquerque, NM (up 103%), Springfield, IL (up 95%), and South Bend, IN (up 86%).

In terms of ROI in metro areas, those that witnessed the biggest quarterly increases in profit margins during the first quarter of 2021 included Springfield, MO (ROI up 120 percent); Provo, UT (up 118 percent); Omaha, NE (up 101 percent); Lynchburg, VA (up 101 percent) and Pittsburgh, PA (up 88 percent). For context: the average gross flipping profit is the difference between the purchase price and the flipped price (not including rehab costs and other expenses incurred, which flipping veterans estimate typically run between 20 percent and 33 percent of the property's after-repair value).

 

WHERE IT WAS HOTTER THAN HOT & NOT-SO-HOT

Where did investors double their money? There were only five markets where investors sold for at least twice the median investor purchase price. Of the 108 metro areas with enough data to analyze (4.6 percent) those included Pittsburgh, PA (225.6 percent return, up from 120.1 percent in the first quarter of 2020); Springfield, IL (119.5 percent return, up from 74.6 percent a year ago); Chattanooga, TN (104.6 percent return, up from 93 percent a year ago); Philadelphia, PA (103.5 percent return, down from 104.1 percent a year ago) and Fayetteville, NC (100 percent return, down from 131 percent a year ago).

Meanwhile some of the tiniest raw profit margins were in southern and midwestern metro areas including Gulfport, MI ($12K profit) and Houston, TX ($24K profit) and Austin, TX ($28K profit).

These statistics are a good reminder of how national trends may or may not be reflected in certain local real estate markets. It also underscores how critical it is to know the constraints of what factors fuel success and maximum ROI, and which decisions are critical to consider before you fix-and-flip.

 

CASH IS STILL KING

In the first quarter of 2021, the percentage of fix-and-flips acquired with cash by investors climbed to 59.2 percent, up from 57.7 percent in the fourth quarter of 2020, but still a drop from 59.9 percent the previous year. Hard-money lenders are ideal in this scenario. They can provide quick cash for your fix-and-flip project. Remember that not all hard money lenders are the same; aim for a 100% advance rate up to 70% of the after-repair value (or ARV). The ability to close on an investment property with no money down provides fix-and-flip investors with more cash reserves so they can invest in more property.

 

A TIGHT TURNAROUND

In the first quarter of 2021, the average time of completed transaction from fix-and-flip purchase to market sale is down nationally to a reported average of 159 days, the lowest level since the third quarter of 2013 and down from an average of 175 in both the fourth quarter and first quarter of 2020. Partnering with the right lender makes all the difference in terms of how quickly you fix-and-flip to produce maximum profit. And lenders who make it easy for home investors to obtain funds faster and get the rehab done quickly and well, leads to more deals and the ability to produce more profit.

 

Are you ready to foolproof your next fix-and-flip? Get smart and download our free flowchart!

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Topics: Fix-and-Flip Financing Tips, House Flipping Market Insights