2021 – Page 25

Riding the Market Wave

by Craig Lasson
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Fix and Flip Has Never Been More Profitable Than It Is Today by Craig Lasson The real estate market has become increasingly frantic, making fix and flip both more attractive to investors and more competitive. The winners in this market will be those with a good eye for value and a quick exit strategy. To get an idea of how hot the real estate market is, consider that in June of 2021, a waterfront house in Jupiter, Florida, purchased for $24 million was relisted by the new owner two days later for $30 million with every expectation that it would sell. Instead of the traditional “fix and flip,” some investors are simply skipping straight ahead to the flip stage in order to take advantage of rapidly increasing property prices. The Radian Home Price Index According to the Radian Home Price Index (HPI) provided by Radian’s subsidiary Red Bell Real Estate, LLC, the number of existing homes on the market in the spring of 2021 was more than one-third lower than at the same time last year. High demand and low supply have inevitably driven prices skyward. From March through May 2021, home prices nationally rose 11.5% according to the HPI, with the median home price in the U.S. soaring to $280,002. And as prices rise, the speed of transactions is accelerating too. According to the HPI, nearly half (44%) of homes for sale in April were on the market for less than a week before going pending. Even deep-pocketed institutional investors are feeling the heat of this market. One investor revealed that even though they are submitting cash offers five percent above list price on average, their firm is winning only about 30% of bids. In fact, a record number of homes are selling over asking price. The HPI revealed that nearly half (45%) of homes were sold abovelist price in June 2021, up from 21% in June 2020. Reports of cutthroat bidding wars and offers exceeding $1 million over asking price have cropped up in recent months. In addition, fix and flip investors are also contending with the rising costs and timelines of renovation. A COVID-related materials shortage and increased demand has pushed the price of lumber up from about $400 per thousand board feet in February 2020 to a record high of more $1,600 in early May before settling back around $800. But even if you can afford the lumber, there is a severe shortage of laborers to do the work. The Bureau of Labor Statistics (BLS) reported in April there were 357,000 more construction jobs than there were workers. What Does the Future Hold? And yet, even with all these pressures—low inventory, institutional competition, increased labor costs—for some, fixing and flipping has never been more profitable than it is today, with some investors reporting profits up three-fold over last year. As long as home prices continue to rise faster than the cost of renovating, the fix and flip market will be well-positioned to ride the wave. What is driving this market is a combination of secular trends that complement and build on each other. First, the COVID-19 pandemic accelerated a move out of urban areas as families and professionals sought more space to work from home. Others made long-distance moves for a more affordable lifestyle. States with a high cost of living like California and New York lost residents in 2020, while Texas, Florida and Arizona gained population. Adding fuel to the fire were historically low interest rates and low inventory, which sparked fierce competition among those looking to make moves. With so much activity in the housing market, it is reasonable to ask: Is this a bubble like the one that triggered the Great Financial Crisis? Many housing experts—including the chief economist of the National Association of Realtors®—say no. For one thing, the fundamentals are very different today. Stricter lending standards have improved the quality of mortgage loans approved after 2008 and reduced risk in the market. The gradual return to pre-pandemic life is taking a bit of the anxious edge off the market, and as prices rise, more and more people are simply priced out of the market, reducing demand. But fear of being caught mid-renovation when the market cools can make fixing and flipping seem like a high-stakes game of musical chairs. The typical 90-day sweet spot between acquisition and sale is increasingly harder to hit because of the shortage of skilled contractors. Cosmetic improvements take less time, but complete tear downs can take more than a year. And as more days go by, the hard costs of financing begin to add up and the risk of a market correction increases. In the face of such uncertainty, the real estate axiom, “make your money on the purchase” has never been more true or more relevant. If you can find a good deal, you will have more options that could increase the likelihood of making money on the back end. Alternatively, you could skip straight to the flip without any rehabbing at all, just like thatoptimistic speculator in Jupiter, Florida looking for a $6 million payoff after 48 hours. In thismarket, stranger things have happened.

Profitable Fix and Flip Properties

by Gunnar Blix
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How to Find Them in Today’s Market by Gunnar Blix With today’s record-low housing supply and unprecedented home-price growth, investors who fix and flip properties face a difficult challenge. Consumers, worried that housing affordability will soon be out of reach, want in on the market now, especially while interest rates are low. Bidding wars are prevalent on many properties—including fixer-uppers that used to primarily only interest investors. As a result, it’s hard to find residential properties to flip—even distressed ones—at the prices needed for a healthy profit. Fix and flip investors are feeling the heat, with data showing that overall flip-sales rates are down. In the current environment, where can investors still find viable properties to fix and flip? Beyond that, how can investors identify locations where properties are less likely to yield a profit? More than ever, data and analytics can play a crucial role in helping to inform investment questions and decisions. The right data can help identify markets that still offer opportunities as well as those that have stalled. Using Black Knight’s comprehensive public-records deed information, and MLS data, we gleaned important insights about local-market flipping activity at the CBSA level. Our Home Price Index and automated valuation models (AVMs) added context to the analysis, for a deeper understanding of area price trends. While a manual search of this information would be daunting, Black Knight’s technology enabled us to analyze the data on a single platform and quickly generate the results in easy-to-read visuals. How Prevalent is Flipping? While overall flipping activity has decreased across the U.S., some locations are still experiencing relatively high flip-sales rates (defined as the ratio of flip sales to total of existing single-family residential and condominium sales). Flip sales ranged from being essentially non-existent in some markets to reaching above 15% of sales in other markets following the Great Recession. Some of the markets currently experiencing the highest flip-sales rates are in the Western U.S., with the Phoenix metro area leading the way at 8.0%, followed by the Tucson metro area at 7.4%. How Has Flipping Changed? Over the last year, we experienced consistent declines in flip-sales rates across most of the largest U.S. metro areas. The map below shows the first quarter 2020 to 2021 year-to-year change in the flip sales rate by metro area, measured in basis points (hundredths of a percentage point). Most areas are “in the red,” indicating slowing flip sales. There are noticeable declines along the California coast and in larger metro areas in the Northeast, including Boston, New York and Washington D.C., and along the east coast of Florida and Texas Gulf Coast. There are also areas of flip-sales growth, indicated in green. For example, Flagstaff, Arizona, and Española, New Mexico are experiencing a surge in flips as the local markets see renewed interest, good inventories and strong price growth. Metro areas adjacent to Denver and Reno are benefitting from being on the fringes of second-home markets where inventories are tight. We can get a sense of the potential to profit from flips by analyzing the delta between purchase and sales price. This represents the gross profits, and significantly overestimates the net profits investors realize. Investors incur not only the costs of needed updates, but buying, carrying and selling costs that can easily top $30,000 or more. Nevertheless, the gross return on investment (ROI) indicates how likely investors are to realize gains, and the change in the gross ROI confirms if markets are becoming more or less profitable. The trends clarify where profits may be going up, slowing down, or staying the same, and can help inform property-purchase decisions. The map below confirms that some markets where flipping became less prevalent last year—like Los Angeles, San Diego and Washington, D.C.—showed a drop in ROI. But this is not consistent across all markets. Denver, Miami, Atlanta and New York, where flipping decreased, are showing (at least weakly) improving ROI. In other markets where flipping is increasing—such as Flagstaff—profits appear to be decreasing. Finally, a few smaller metro areas such as Madison, Wisconsin, are showing both an increase in flipping and ROI. Investors need more information than just the gross ROI growth of a market to make sound investments. The sweet spot for flipping relies on several factors working together to create market opportunities. The market must support rising home prices to afford investors a high potential for profits, as indicated by rising home price trends. However, markets can become too hot or too tight for investors to buy at depressed prices, which is currently the case in many markets. One factor correlating strongly with profitable flipping markets is the share of distressed real-estate sales, shown in the map below. Investors should keep an eye on MLS statistics, like average time on market and months’ supply of inventory to support the timing of their decisions. Examples of Changing Markets Two example markets may help illustrate the trends. Flipping in San Francisco boomed after the financial crisis on a glut of distressed inventory. For several years, flip-sales rates hovered in the teens, topping out at 15%. However, since 2013, flipping in San Francisco has declined as inventories dried up, home prices soared, and restrictions and lack of buildable land prevented new construction. The Denver metro area saw a rise in flip rates following the financial crisis, but on a much more moderate scale. Flipping rates have largely held steady since, with the expected seasonal variations. Overall, the Denver market appears to leave room for profitable flips. The Right Tools Despite today’s housing supply and purchase prices, there are still locations where investors can purchase viable flips and likely turn a profit. More than ever, though, local market conditions need to be just right—and that’s where data and analytics can play a key role in informing decisions. With the right data and analytic tools, investors can easily discern local market trends and current conditions. Fortunately, this type of data is readily available from technology and data companies that focus

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– Nationally, investors took more inventory off the market than they contributed in April; their purchases represented 5.7% of all home sales – Among the 50 largest U.S. metros, investors made the biggest contributions to inventory levels in: Atlanta, Dallas, Baltimore, Los Angeles and San Francisco – In April, investors took away the most inventory in: Phoenix, Charlotte, Miami, Tampa and Chicago Despite the common perception that investors are always in competition with everyday buyers, new findings from the Realtor.com® Investor Report shows that isn’t always the case. According to the data, investors are exacerbating the inventory shortage in 31 of the top 50 U.S. markets, but in roughly 19 markets they are actually helping to replenish the number of homes for sale. Realtor.com® analyzed U.S. deed records from January 2000-April 2021 to determine the number of investor sales versus purchases in the 50 largest U.S. markets. In this report, areas where investors are contributing inventory refers to places where investors are selling more homes than they are buying. Places where investors are taking away inventory are locales where investors are buying more homes than they sell. “Today’s buyers are facing a tough market and data shows they aren’t just competing with each other. With deep pockets and more flexibility, investors can be daunting competition for the typical homebuyer. Right now, data shows investors are buying more homes than they are selling, and while they get a lot of attention in today’s market, it’s worth remembering that they can also contribute to inventory levels,” said Realtor.com® Chief Economist Danielle Hale. “Whether a market is appealing to investors depends on a variety of factors, including how local home prices compare to rents. When home prices are rising and rents are more stagnant, investors are more likely to sell off properties and contribute inventory. On the other hand, the higher rents are compared to home prices the more attractive the market is to investors looking to buy homes and convert them into rental properties.” Investors help buyers in big metros with limited homes for sale In April, investors added to the number of homes on the market in 19 of the 50 largest U.S. metros, with Atlanta (+399 homes), Dallas (+239 homes), Baltimore (+188 homes), Los Angeles (+112 homes) and San Francisco (+93 homes) seeing the biggest contributions. Compared to the markets where investors took away inventory in April, these metros tend to be bigger, with fewer homes for sale and higher listing prices. Compared to nationwide inventory declines in April (-53%), the top 10 markets where investors are contributing saw a smaller drop, at an average -44% during the same timeframe. However, some of these metros saw even bigger inventory gaps from last year, including the two markets where investors contributed the most inventory in April: Atlanta (-63.4%) and Dallas (-69.7%). At an average population size of 5.5 million, these markets also encompass some of the nation’s biggest tech hubs, such as San Francisco and San Jose. Home to some of the most expensive real estate in the U.S., these metros had an average median listing price of $668,000 in April, well above the national median price of $375,000. Hale added, “High home prices, slower rent growth, and uncertainty over the future of work in these markets are likely causing investors to reevaluate their property portfolios in these areas. And with homes still selling quickly, even in these metros, an investor deciding to sell can look forward to being able to reposition their dollars elsewhere in a very short period of time.” Investors are snatching up homes in smaller markets with higher inventory levels Investors took away inventory in 31 of the largest U.S. markets, led by Phoenix (-429 homes), Charlotte, N.C. (-287 homes), Miami (-256 homes), Tampa (-224 homes) and Chicago (-221 homes). Compared to the markets where investors helped buyers, these metros are smaller and less crowded, with more available home listings relative to all households, lower home prices, and relatively higher rental price growth. While average home prices are more affordable in these top markets, rental prices grew at a faster year-over-year pace on average (+4.6%) than in top markets with more investor sales (+0.1%) in April. In Tampa, where the $327,000 median listing price was below the national average of $375,000 in April, rents grew 4.5 times faster than the national rate, up 12.4% year-over-year. The markets where investors are competing with homebuyers and taking away inventory tend to offer the perfect storm of factors for converting homes into rental properties. These markets have relatively more homes available, at 3.7 properties for every 1,000 residences versus 2.8 in markets where investors are adding to inventory. While these metros have experienced more rapid year-over-year inventory declines in April (-57%), rapid rent price gains keep calculations favorable for buying which means that until rent trends change, investors are likely to be homebuyer foes, not friends. “Getting ahead in today’s market is tough, especially when you are contending with professional investors,” said Lexie Holbert, home and living expert at Realtor.com®. “Setting up price alerts on Realtor.com® is a really helpful trick for getting ahead of the competition. When a home that meets your parameters hits the market, you’ll get a notification so you can get in and try to make an offer.” About Realtor.com®Realtor.com® makes buying, selling, renting and living in homes easier and more rewarding for everyone. Realtor.com® pioneered the world of digital real estate more than 20 years ago, and today through its website and mobile apps is a trusted source for the information, tools and professional expertise that help people move confidently through every step of their home journey. Using proprietary data science and machine learning technology, Realtor.com® pairs buyers and sellers with local agents in their market, helping take the guesswork out of buying and selling a home. For professionals, Realtor.com® is a trusted provider of consumer connections and branding solutions that help them succeed in today’s on-demand world. Realtor.com® is operated by News Corp [Nasdaq: NWS, NWSA] [ASX: NWS, NWSLV] subsidiary Move, Inc. under a perpetual license from the National Association of REALTORS®. For more information, visit Realtor.com®.

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Executive Team Expanded to Drive Portfolio Growth and Customer Experience Enhancements Mr. Cooper Group Inc. (NASDAQ: COOP) announced two additions to the executive leadership team as the company focuses on becoming the largest home loan company in the country, with a customer-centric culture and best-in-class digital tools. Shawn Stone was named Executive Vice President and Chief Revenue Officer and will focus on the company’s accelerated growth strategy, exploring new delivery channels and finding more ways to leverage Mr. Cooper’s technologies to deliver experiences that delight customers. In his role, Stone will also lead the Mr. Cooper Originations business. “Shawn is joining our team at a pivotal moment as we position Mr. Cooper to become the largest home loan company in our industry, and I am excited for his vision and strategic leadership to ensure we capitalize on our strengths and find more opportunities in the market,” said Jay Bray, Chairman and CEO of Mr. Cooper Group. “I am pleased to welcome Shawn back to Mr. Cooper Group and believe he is a natural fit into our incredible culture.” Stone joins Mr. Cooper from Renovate America where he served as the company’s Chief Executive Officer and a member of its Board of Directors. Previously, Stone was Chief Executive Officer and executive founder of Global Mortgage Capital where he started a nationwide independent mortgage banking business that included multiple mortgage origination, servicing and financing companies. Prior to that, Stone was an executive leader at Mr. Cooper, where he worked for 18 years serving in leadership roles in originations, servicing, capital markets, finance and as founder and President of Xome. Additionally, Jay Jones was promoted to Executive Vice President, leading the company’s industry leading Servicing business. Jones joined Mr. Cooper in July 2019, most recently serving as Senior Vice President of Servicing. He has more than 25 years of experience in the mortgage industry and has held various key leadership roles, strategically guiding mortgage servicers through the ever-changing industry landscape. Before joining Mr. Cooper, Jones served as Executive Vice President and Chief Strategy Officer for Celink and as Executive Vice President at CIT Bank, where he led the Residential Servicing Operations Division. “I am thrilled for Jay’s promotion and greatly value his perspective as part of our leadership team. Jay is a staunch advocate of keeping the dream of homeownership alive for our customers, and his leadership and expertise will be key as we continue to focus on growing the portfolio while delivering greater value and a better experience for customers,” said Bray. As members of the executive leadership team, Stone and Jones both report to Chris Marshall, Vice Chairman, President and Chief Financial Officer of Mr. Cooper Group. “Mr. Cooper remains focused on transforming the mortgage experience, and Shawn and Jay have the operational strength and challenger mindset to rally our team behind this mission,” said Marshall. “We are grateful to have them on the team as we move forward with our plans to accelerate profitable growth while delighting our customers.” About Mr. Cooper Group Mr. Cooper Group Inc. (NASDAQ: COOP) provides quality servicing, origination and transaction-based services related principally to single-family residences throughout the United States with operations under its primary brands: Mr. Cooper® and Xome®. Mr. Cooper is one of the largest home loan servicers in the country focused on delivering a variety of servicing and lending products, services and technologies. Xome provides technology and data enhanced solutions to homebuyers, home sellers, real estate agents and mortgage companies.

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Funding validates recent progress and significant market opportunity, enabling RentSpree to create the first platform allowing multiple parties to cooperate on a rental transaction. RentSpree raises $8 million in Series A funding. The funding round was led by 645 Ventures and additional investors including Green Visor Capital, and Vesta Ventures. RentSpree will use the investment to enhance its API-first integration capabilities and to provide the definitive platform for renters, agents, and owners to complete all pieces of their rental journey. RentSpree, the fastest growing rental transaction software company, announced that it closed $8 million in Series A funding led by 645 Ventures. New investors Green Visor Capital and Vesta Ventures also participated in the funding round. “Today’s announcement is a huge milestone for RentSpree– one that validates our vision to create efficient, value-add solutions for all parties involved,” says Michael Lucarelli, co-founder and CEO of RentSpree. “We are most excited to further streamline the rental process while helping individuals achieve long-term goals that extend through the rental journey and beyond.” Founded in 2016, RentSpree has experienced impressive growth. After previously raising $2.3M in venture funding, RentSpree now services over 600,000 users and has nearly quadrupled monthly renters since closing its Seed funding round. More than just a tenant screening company, RentSpree covers every step of the rental process. The platform is also the first of its kind to support the collaboration of multiple parties because renters typically interact with a combination of real estate agents, landlords, and property managers to secure a single rental. RentSpree facilitates these interactions by providing universal rental applications, report sharing, a rental forms library, digital signatures, renters insurance, and much more. With this investment, RentSpree will add valuable new features like payments, agent branding, and contact management to further reduce rental friction. Special emphasis will be placed on building predictive analytics to ensure that individuals are guided seamlessly to the right features at the right time. “The real estate industry has seen significant growth in rental activity over the past decade, and RentSpree is on the forefront of providing software that deploys quickly and streamlines crucial operations that haven’t seen innovation in a very long time,” says Nnamdi Okike, Co-Founder and General Partner of 645 Ventures. “With the growth RentSpree has experienced in its user and customer base, as well as in their product offerings, we’re excited to see them become the leader in providing world-class renter management software.” RentSpree employs an integration-first approach and has already deployed its standardized rental process with a who’s-who list of real estate players, including the California Association of REALTORS®, Bright MLS, California Regional MLS, Florida Realtors®, and many more. For more information about RentSpree, visit www.rentspree.com/press About RentSpree: Founded in 2016, RentSpree is an award-winning rental software known in all 50 states for its easy-to-use tenant screening process, renter management, partnership program, and rental screening API. In just five years, RentSpree has grown its database by partnering with some of the most trusted names in real estate.

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Chicago Area and East Coast States Remain More Exposed to Pandemic’s Impact During Second Quarter of 2021; Most Vulnerable Areas Are More Scattered Around Nation Than in Prior Quarter; Western States Continue to Have Most Favorable Market Conditions ATTOM, curator of the nation’s premier property database, released its second-quarter 2021 Coronavirus Report spotlighting county-level housing markets around the United States that are more or less vulnerable to the impact of the ongoing Coronavirus pandemic, still endangering the U.S. economy. The report shows that states along the East Coast, as well as Illinois, were most at risk in the second quarter of 2021 – with clusters in New Jersey, Delaware, the Chicago area and central Florida – while the West remained far less exposed. But the 50 most at-risk counties around the U.S. were spread over a wider area than in the first quarter of 2021, as most states had no more than two counties in the top group in the most recent time period. The report reveals that Florida, New Jersey, other East Coast states and Illinois had 37 of the 50 counties most exposed to the potential economic impact of the pandemic in the second quarter of 2021. They included seven counties in the Chicago metropolitan area, four near New York City, all three in Delaware and four in central Florida. However, only Florida, New Jersey, Illinois, Louisiana and Delaware had more than two counties in the top 50, compared to eight states in the first quarter of 2021. The top 50 were scattered across 18 states in the second quarter, compared to 15 the prior time period. The only three western counties in the top 50 during the second quarter of this year were in northern California and southern Arizona. Markets were considered more or less at risk based on the percentage of homes facing possible foreclosure, the portion with mortgage balances that exceeded the estimated property value and the percentage of average local wages required to pay for major home ownership expenses on median-priced houses or condominiums. The conclusions are drawn from an analysis of the most recent home affordability, equity and foreclosure reports prepared by ATTOM. Rankings were based on a combination of those three categories in 564 counties around the United States with sufficient data to analyze in first and second quarters of 2021. Counties were ranked in each category, from lowest to highest, with the overall conclusion based on a combination of the three ranks. The findings follow a year when the national housing market continued its decade-long boom even amid the pandemic, with median single-family home prices rising more than 10 percent across much of the country. While small indicators of a possible slowdown have emerged in 2021 in the form of declining home affordability and slumping investor activity, fuel for further price gains has come from the pandemic receding, employment growing and the broader economy improving. Still, the pandemic remains a threat to the economy and the housing market as new virus variants appear and clusters of virus cases continue to plague pockets of the country. “The Coronavirus pandemic is easing, and the U.S. economy is gradually coming back to life, which suggests that the nation’s housing market will indeed escape any major damage from the crisis. No major signs are showing anything different at this point. Nevertheless, the pandemic is still out there and remains a potent threat to home sales and values, as well as to the broader economy,” said Todd Teta, chief product officer with ATTOM. “Amid a generally upbeat outlook, we continue to see areas that appear more at risk for a fall, especially in specific areas of the East Coast and Midwest. As we have throughout the pandemic, we will keep a close eye on those areas in case the situation worsens and the pandemic surges again.” Most vulnerable counties clustered around Chicago, New York City, Delaware and central Florida Eighteen of the 50 U.S. counties most vulnerable in the second quarter of 2021 to housing market troubles connected to the pandemic (from among the 564 counties with enough data to be included in the report) were in metropolitan areas around New York, NY, and Chicago, IL, as well in Delaware and central Florida. They included seven that cover Chicago (Cook County) and its suburbs (De Kalb, Kane, Kendall, Lake, McHenry and Will counties) and four in the New York City metropolitan area (Ocean, Passaic and Sussex counties in New Jersey and Orange County in New York). The four in central Florida were Highlands County (Sebring), Indian River (Vero Beach), Lake County (outside Orlando) and Osceola County (Kissimmee). All three Delaware counties – New Castle (Wilmington), Kent (Dover) and Sussex (Georgetown) – made the top 50 list as well in the second quarter of 2021. Additional counties in Florida, New Jersey and Illinois also made the top-50 list. Those in Florida were Bay County (Panama City), Clay County (outside Jacksonville) and Marion County (Ocala), FL, while those in New Jersey included Atlantic County (Atlantic City), Cumberland County (Vineland), Gloucester County (outside Philadelphia, PA), Mercer County (Trenton) and Warren County (near Allentown, PA). Others in Illinois were Kankakee County, Madison County (outside St. Louis, MO), Saint Clair County (outside St. Louis, MO) and Tazewell County (outside Peoria). In addition, Louisiana had three counties in the top 50 during the second quarter – Bossier Parish (Shreveport), Livingston Parish (outside Baton Rouge) and Tangipahoa Parish (north of New Orleans). The only western counties among the top 50 most at risk from problems connected to the Coronavirus outbreak in the second quarter of 2021 were Butte County (Chico), CA; Humboldt County (Eureka), CA and Mohave County, AZ (outside Las Vegas, NV). Higher levels of unaffordable housing, underwater mortgages and foreclosure continue to appear in most-at-risk counties Major home ownership costs (mortgage payments, property taxes and insurance) on median-priced single-family homes consumed more than 30 percent of average local wages in 23 of the 50 counties that were most vulnerable to market problems