Transactions in the fix and flip market have been booming in recent years, with more than 407,000 homes flipped in 2022, up 14% over 2021 and up 58% over 2020, according to a recent report by real estate data firm ATTOM.
In fact, ATTOM reports that one in 12 home sales in the nation last year, or 8.4%, involved fix and flip investors — whose strategy is to acquire, renovate (fix) and then resell (flip) the properties.
Although the number of flips last year was the highest since at least 2005, ATTOM reports that “profit margins on the typical flip in 2022, which took an average of 5 ½ months to complete, slumped to just 26.9%.”
At that margin, ATTOM notes, the cost of renovations, property taxes, mortgage interest and other expenses — which in total consume 20% to 33% of the resale value — could easily cancel out any return on investment for the flipper.
Keith Lind, CEO of Acra Lending, which launched a fix and flip lending program last year, said there are a lot of “compounding issues” now facing investors in the space.
“A year ago for us, fix and flip [loan interest] was probably 6.5%, but today, you’re probably getting between 10% and 12%,” Lind said. “When you’re paying that much debt service, it’s harder to make a project work, on top of the fact that originators like us and others, like Kiavi, have tightened our advance rates.
“A year ago, we were offering to lend 85% loan-to-cost or 90% loan-to-cost, and that’s down to like 75% loan-to-cost. So, now, not only does the investor need to come in with more money to close the deal, but they also are paying a much higher interest rate … and then you have home prices coming down or flattening out [as renovations are underway] … so it’s harder to make that deal work today.”
ATTOM notes that the fall-off in the typical return on investment (ROI) for a fix and flip deal in 2022 represents the fifth decline in the past six years. The 2022 margin for a median-priced flip was down 6 percentage points compared to 2021’s mark of 32.6%, and it was off 15 percentage points from 2020 — and at barely half the peak ROI of 51% hit in 2016.
“More investors keep looking to flip homes … but are making less and less in the process “ ATTOM CEO Rob Barber said. “How long that can continue is hard to say.”
Catching the headwinds
Brandon Lwowski, director of research at HouseCanary, a proptech firm that provides institutional investors, lenders and other clients with residential real estate analysis, said the 2021-2022 time frame was an “optimal market for flippers” because of strong home-price appreciation, tight home inventory and “huge demand.”
Today, he said we still have strong home prices, which have been trending upward again since the start of the year; limited for-sale inventory; and solid demand, though not at the level we experienced in 2021-2022, when 30-year fixed interest rates were in the 3% range or less — versus more than twice that today.
“The deep-pocket cash buyers definitely can find some deals and make a good ROI, but for the people depending on debt to purchase their flip, they are really going to have to be careful and strategic … because the financing is becoming so expensive in this high interest-rate environment,” Lwowski said. “The big thing is the carrying cost that a lot of [smaller] investors don’t realize.
“If you’re taking three, four months to flip this house, that’s four more months of a mortgage that you’re going to have to pay at a high interest rate, [plus dealing with rising labor and material prices due to inflation]. It’s really going to take a piece out of your return when you start to calculate your carrying cost on that property [while the renovations are happening].”
ATTOM’s Barber points out that home-flipping activity in 2022 hit a 17-year high even as ROI hit a 14-year low — “with returns dropping in three-quarters of the metro areas analyzed in 2022.”
“It shows competing trends that will hit a breaking point at some time in the near future,” Barber said, “dictating whether home-flipping keeps growing or recedes as a small, but important niche in the U.S. housing market.”
Arvind Mohan is CEO of Kiavi, a fix and flip lender that has originated some $12.3 billion in loans over the past nine years and completed a dozen securitization deals to date involving fix and flip loans, including three transactions last year and one so far this year. Mohan added that Kiavi plans ideally to do three to four securitization deals a year, an outlet that creates liquidity for the company that helps to fund future loans in the space.
Mohan agrees that the market is tough right now, favoring well-capitalized lenders like Kiavi because it allows them to increase market share as other smaller lenders in the space pull back. He said Kiavi’s fix and flip business is basically flat so far this year versus 2022, but its market share is rising, and he does see signs of a recent “pickup” in the market.
“Comparing Q1 2022 to Q1 2023, we’re seeing [fix and flip transaction volume nationally] roughly 45% to 50% lower,” he said. “Then, if you look at the entire year of 2022 relative to what we are projecting through our data models for 2023, it will be down roughly like 25% to 30% in transaction volume … so we do think there’s some normalization happening right now.
“… As of late February to early March , we’re definitely seeing participants come back into the market [after a late-year lull in 2022 sparked by uncertainty],” Mohan added. “It’s not by leaps and bounds by any means, but people are definitely trickling back into the market, getting confidence that things are moving [in a better direction].”
Acra’s Lind said moving forward, it will be the “larger, well-capitalized originators,” like Kiavi, Acra and others, such as Roc Capital, that will dominate the fix and flip sector. He said those originators that have managed their balance sheets well over the last year and into this year will be the ones to gain market share in the fix and flip space.
“The fact is,” Lind added, “there’s a lot of originators still not making money, and you can only do that for so long. … There’s smaller companies or even midsize companies that now have two choices: Either go out of business or find a partner to buy them, and I think no one wants to go out of business.”
Lind added that he expects to see consolidation ahead, with “some of the bigger guys starting to acquire some of the smaller guys” both fix and flip lenders and mortgage lenders generally.
“We’re already starting to see opportunities that we’re looking at,” he added.
Betting on boomers
Some 75% of the mortgage universe is now locked in at rates less than 5%, which is “creating a huge supply crunch” due to higher prevailing rates, according to Lind. Despite that existing challenge, a bright spot ahead for the fix and flip market, he added, is that a significant number of current homeowners are aging baby boomers (born between 1946-1964).
“In the current market, there are a lot of baby boomers who are now starting to and will continue to downsize [their homes],” Lind said. “Their homes will go on the market, and that creates more opportunity, including for fix and flip in areas where baby boomers want to live.”
Those areas, Lind said, include the U.S. Southeast and Southwest — i.e., North Carolina, Florida, Texas and Arizona. “They [baby boomers] want to probably be in the Southeast or Southwest, which is another reason why we’re planting our foot down there because we do think there’s a ton of opportunities,” Lind said.
Another tailwind ahead for the fix and flip market stems from the nation’s aging housing stock. Kurt Carlton, co-founder and president of New Western, a private real estate investment marketplace serving some 165,000 investors, said there is a huge number of homes in the nation that were built 20 to 40 years ago, which is important because at that point homes start to need major repairs.
“There’s 25 million homes approaching [or in] that age group, so there’s a big glut of homes hitting this point in their life,” Carlton said. “There’s going to be a lot more distressed inventory, not because of foreclosures, but just because of that [the aging of the property].
“People are calling it the Great Renovation. …I think that will be good for the real estate investors [flippers] because they’re going to have a lot of work to do.”
Lind agrees that longer-term, the outlook for the fix and flip market remains strong.
“We think there’s definitely room for it to run over the next five to 10 years,” he said. “We think it’s going to be significant lending product.”