Hot housing market creates fix and flip opportunities

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In today’s hot residential real estate market, home rehab contractors occupy a sweet spot. Why?

The U.S. housing market is hot

Lots of buyers are looking for new homes.

Some need lower payments. Others want to trade up. As a result:

  • Existing home sales hit a 14-year high in September 2020, said the National Association of Realtors.
  • Housing inventory declined to 2.7 months’ supply, a record low.
  • Median home prices rose nearly 15%, compared with a year ago.

Fix and flip opportunities produce profits, but banks are squeezing borrowers

Here’s a 15-year historical view of fix and flip projects. While sales continue to rise, the percent of fix and flip projects purchased with financing fell slightly in 2019.

Hot housing market creates fix and flip opportunities

Fix and flip projects are growing, but the percent of projects that get financing has fallen, said ATTOM Data Solutions.

Fix and flip projects in 2019 represented:

  • 246,000 home sales.
  • About 1 out of 16 U.S. homes sold.
  • About 6.2% of all home sales.

How can home rehabbers succeed in today’s market?

Despite fix and flip market growth, making a profit is getting tougher for contractors.

A typical fix and flip project generated a gross profit margin of 40.6% in 2019, compared with its original acquisition price. But these margins shrank from 45.8% in 2019 and 51.4% in 2017, said Todd Teta, chief product officer at ATTOM Data Solutions.

How to preserve your margins? Avoid 4 traps that renovation contractors fall into.

1. Be patient. In a tight market, it’s hard to find existing properties that can be profitably fixed and flipped. Take your time to make the right call.

2. Limit your financial risk. Don’t pay too much for an existing property. A good rule of thumb is never to pay more than 70% of the home’s after repair value (ARV), minus the repair costs. That is, the MAO (Maximum Allowable Offer) = 70% (ARV) –  Repair Costs.

Do all the work to make solid estimates for the required repairs. Just one hidden structural problem can eat up all your potential profits.

3. Don’t underestimate the work required. You know how to estimate costs and how long the work will take, but which renovations will pay off best?

In the East South Central region, including the Nashville area, Remodeling magazine expects these 10 project types return the most value.

Hot housing market creates fix and flip opportunities

These 10 types of renovations offer the best payoffs, said Remodeling magazine. 

4. Find financial backing. Find a lender who understands your local real estate markets and the economics of fix and flip projects.

The catch is, loans are much harder to get. “Currently, we’re seeing the lowest level of credit supply since 2014,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, told Forbes. “A lot of it is due to economic weakness or uncertainty.”

Mortgage availability is falling

 

Mortgage availability is falling, said the Mortgage Bankers Association.

That’s why more contractors are turning to alternative sources of financing for fix and flip projects, like Beacon.

We work with contractors in the Nashville area to find, fix, and flip or rent affordable housing units. Beacon offers renovation financing with low transaction fees, transparency, great customer service and flexibility.

To build your fix and flip business, subscribe to the Beacon blog, which appears on the second Saturday of each month.