Not since the heady days of the mortgage boom in 2007 have we seen such
a frenzy of house flipping. According to studies conducted by ATTOM Data
Solutions, which is the parent company of website RealtyTrack.com, the
data shows that the flip market is making a comeback.
After real estate speculation nearly brought the entire market down during
the economic crisis of 2008, Wall Street banks decided to sit on the sidelines
for the past several years, allowing private money to fund the recovering
investor market. However, with the amount of home flipping on the rise,
banks are starting to take notice and making moves towards more participation
in the sector.
Whereas, during the height of the mortgage boom where much of the speculation
took place by amateur investors using equity from their primary residence,
today’s market seems to be driven more by savvy entrepreneurs who
are taking advantage of the deep discount accompanying distressed properties.
According to the research provided by ATTOM, the average profit generated
on each flip purchase is roughly $61,000. That is an increase of $40,000
over the bottoming-out period during 2009, when the number of foreclosures
While profits are up, banks have begun to introduce new financing options
for house-flippers. With the percentage of debt-financed house flipping
at levels not seen since 2008, banks are slowly acclimating themselves
to this smaller, niche market. Lenders are seeking out investment buyers,
not the other way around. Moreover, with the property values continuing
their ascent, it appears Wall Street is confident enough to begin pursuing
greater market share.
First, financial institutions are working with a smaller sector –
those quick sellers. Some lenders have created programs specifically for
investors who buy and sell property in a matter of months, not years.
However, easy access to credit is only beneficial when there is available
inventory. Currently, it is a seller’s market, and many flippers
in metro areas such as Los Angeles, have a hard time finding new properties
priced low enough for a built-in profit. However, with the availability
of easy financing and more money available than properties to buy, the
real estate investment community is adjusting its marketing strategy to
keep the profits flowing.
The big banks, including Goldman Sachs, J.P. Morgan Chase, and Wells Fargo
are getting in on the action by extending credit to companies that specialize
in financing flip properties. An Irvine, California lender that offers
to finance property-flipping investors recently secured a $60 million
investment from J.P. Morgan. Some banks have even arranged conferences
in the major metropolitan housing markets, meeting with industry stakeholders
and offering credit facilities.
A notable difference between this boom and the last is the care that financial
institutions place into reviewing borrowers’ profiles before extending
credit. Bankers admit to spending weeks evaluating the lender underwriting
criteria to ensure that borrowers can repay the loans. Such attention
to detail was not a diligent attribute of banks during the last housing
bubble, which as most know, led to significant losses by extending credit
to inexperienced real estate speculators.
Still, with all of these safeguards in place, critics are sounding alarm
bells. While a major portion of house flipping today is being carried
out by institutional investors or savvy entrepreneurs, the sector is still
enticing novice participants. In fact, the number of new buyers in the
house flipping market is beginning to rise, as people watch reality TV
or see homes in their neighborhood being renovated. Many of these buyers
prepare themselves for the endeavor by attending seminars, enrolling in
online real estate courses, or through partnering with a local contractor
ATTOM noted in their report that the recent uptick in speculative housing
is “concerning.” They see the participation rate in this sector
as a form of ghost rising from the past financial crisis. With the profit
margins in certain markets getting tighter, investors are buying properties
with only 10 to 15% built-in profit margin. A typical investor usually
seeks a 30% discount, providing enough wiggle room for unforeseen rehab
costs. Lenders have not ignored the risk. While most private lenders indicate
their borrowers are prudent, some have begun to limit their loan sizes
to reduce exposure.
The recent presidential election has also stirred unintended fears in the
housing markets. Mortgage rates have been steadily rising since Donald
Trump’s election victory unexpectedly resulted in a record stock
market rally. With rising rates and home prices reaching highs not seen
since 2007, consumers may refrain from buying homes if the trend continues,
which would make it more difficult for investors to quickly flip properties.
Some investors are already making a decision to liquidate their projects
and sit on the cash until the next housing correction is complete.
There is no real data available for the number of flip houses that end
up in foreclosure. However, ATTOM Data Solutions reports that in 2016,
the number of foreclosures on investment properties nearly doubled that
of owner-occupied homes. The numbers are concerning, considering that
the same rate was about 30% lower in previous years.
Since the election, polls have shown an increase in consumer optimism,
as well as a hopeful business outlook from both companies and economists.
As the house-flipping market continues to grow, lenders must continually
monitor markets to ensure they limit their exposure, while still creating
opportunity. As more financial products geared towards house-flippers
become available, investors and buyers can strike a measured balance between
profitability and security that will result in continued stability for
a market that, by all indications, is booming.
Find out more about the author,
Bryan Redington by reading his bio.