Inspired by reality TV shows on HGTV and other outlets, a new generation of home flippers has been in the market in recent years. These investors hope to make over properties and then make a tidy profit off the sale. But for many, flipping hasn't exactly been made-for-TV.
This is one segment of the market where real estate agents should counsel extra caution.
“Many newbie investors are encountering their first slowdown and facing losses from houses that take too long to sell,” Bloomberg reports. “Meanwhile, they face steep payments on a kind of high-interest debt—known as ‘hard money’ loans—that helped power the boom.”
In the fourth quarter of 2018, about 6.5% of U.S. sales were from flips, or homes sold within a year from a prior transaction. CoreLogic, a real estate data firm, says that marks the highest share in seasonally adjusted data, dating back to 2002. That means even higher than the housing boom days.
Western markets, like Northern California and Seattle, are seeing some of the highest number of flips because prices there have been climbing by double-digit percentages annually. But home prices are flattening or cooling in some areas. Fourth-quarter losses for flippers who sold within a year are at the highest averages since 2009, CoreLogic’s data shows. For example, in San Jose, Calif., 45% of flips lost money in the fourth quarter.
Many home flippers today are using hard-money loans—which often come with high interest rates and low down payments—to fix up the properties before they resell them. The loans tend to be larger since renovation costs are being folded into them.
“Lenders are easing capital requirements and lengthening loan terms because it’s taking longer to flip homes,” Todd Teta, chief product officer at ATTOM Data Solutions, told Bloomberg.
Other lenders are getting more stringent in responding to the slowdown. Glen Weinberg, operating officer of Denver-based Fairview Commercial Lending, told Bloomberg that the company is tightening its lending standards for real estate investors in response. He's now requiring flippers to put 40% down on a house.
Source: “Young Real Estate Flippers Get Their First Taste of Losing,” Bloomberg Businessweek (May 9, 2019)
