House Flipping Numbers Reflective of a Strong Real Estate Market

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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 was peaking.

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 or realtor.

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.

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