House Flipping Hits A Ten-Year High As Lenders Splash The Cash
The perfect storm of available financing, low interest rates and rising house prices is creating a house flipping frenzy.
There’s been a whole lot more flipping than flopping happening recently. Fueled by lenders cash and an abundance of TV shows, home flipping has reached a ten-year high, according to the 2016 year-end U.S. Home Flipping Report by ATTOM Data Solutions, a fused property database.
The new report makes for some startling figures:
- 193,009 single family homes and condos were flipped or sold in an arms-length transfer for the second time in a 12-month period in 2016.
- This marks an increase of 3.1 percent from 2015 to the highest level since 2006.
- Home flips accounted for 5.7 percent of all single-family home sales during the year, up from 5.5 percent last year to a three-year high.
The average home flipped sells at $189,900, a gross profit of $62,624. This is a 49.2 percent return on investment—an all new high for the report which dates back to 2000.
“Home flipping was hot in 2016, fueled by low inventory of homes in sellable or rentable condition along with a flood of capital — both foreign and domestic — searching for the returns and stability available with U.S. real estate,” ATTOM senior vice president Daren Blomquist told HousingWire. “The combination of more home flips and a greater share of financing for flip purchases resulted in a 19 percent jump in the estimated dollar volume of financing for home flip purchases, up to $12.2 billion for the flips completed in 2016—a nine-year high.”
Adding fuel to the flipping fire are big banks such as Wells Fargo & Co., Goldman Sachs Group Inc., and J.P. Morgan Chase & Co. have started extending credit lines to companies that specialize in lending to home flippers, the Wall Street Journal reported.
Contributing to the perfect storm of low interest rates and available capital are rising house prices, reaching levels not seen since before the 2008 financial crisis. Throw in the fact that housing also is in relatively short supply and you have an ideal for get rich quick flippers hoping to keep dancing until the music stops, which it invariably will.
“Investors in search of flipping returns are increasingly willing to move to secondary and tertiary housing markets and neighborhoods with older, smaller properties that are available at a deeper discount,” Blomquist continued. “Given that many of these markets are more affordable, we are also seeing a higher share of the flipped homes sold to FHA buyers, with that share reaching a four-year high of 19.6 percent in 2016.”
The willingness to lend money has seen companies such as RCN Capital offer creative financial programs such as cross-collateralization loans, which allows borrows to use the equity in existing properties to serve as a down payment. Although physically money is not transferred, RCN Capital put a lien on a property currently owned by the buyer with equity in it. It can be addictive for borrowers, who with the lure of quick cash in their sights may risk over-leveraging themselves and being in a bad position if the market suddenly changes as happened in 2008.
Indeed, with the last housing collapse still in the rear view mirror for most flippers, many are aware that there is a finite amount of time until the winds change again and so the incentive is to maximize profits while prices continue to rise. The bigger the flip the more the profit and so flippers are increasingly going more and more high end in search for big pay days.
“With one flip, you could make the same amount that you could with 10 deals of a lower-end property,” Blomquist told the Journal. “But you’re putting many more eggs in one basket and counting on that one property to deliver.”
If some banks are skittish about lending out big numbers for flips, in today’s market there are other sources of capital. Increasingly luxury flippers are turning towards crowdfunding to finance their projects. The funds to finance a deal are raised through the contributions of a large number of people, usually via the internet.
“The biggest benefit we offer is flexibility and a national focus,” Nav Athwal, chief executive officer of RealtyShares, a San Francisco-based company that finances investment properties in 35 states., told the WSJ. Funds come from more than 38,000 high-net-worth individuals who invest in a specific transaction for as little as $5,000.
If all this talk of making money has you psyched up with lenders in your pocket but you’re not sure where to start flipping, here are some 2016 stats according to Housing Wire:
- Pittsburgh has the highest average gross return on investment at 129.5 percent, 6.2 times higher than Austin, Texas, the city with the lowest percent at 21.2 percent.
- Cleveland has the lowest median purchase price at $45,000, 12.9 times lower than San Jose, California, which has the highest price at $580,000.
- Memphis, Tennessee, came in with the highest percentage of home flips at 11.1 percent, 3.5 times higher than the lowest cities of Austin, Texas; Indianapolis and Pittsburgh which totaled 3.2 percent.
- Mobile, Alabama, has the lowest average kitchen remodeling costs at $13,336. Newark, New Jersey has the highest costs as $56,108.
So what are you waiting for? Time to call a contractor.
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