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Home Flipping Rate and Gross Profits Decline Across U.S. in First Quarter of 2021

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Home Flipping Rate Falls in First Quarter to Lowest Level Since 2000 Prices on Flipped Homes Drop, Leading to Smallest Profit Margin in 10 Years ATTOM, curator of the nation’s premier property database, released its first-quarter 2021 U.S. Home Flipping Report showing that 32,526 single-family homes and condominiums in the United States were flipped in the first quarter. Those transactions represented only 2.7 percent of all home sales in the first quarter of 2021, or one in 37 transactions—the lowest level since 2000. The latest figure was down from 4.8 percent, or one in every 21 home sales in the nation during the fourth quarter of 2020 and from 7.5 percent, or one in 13 sales, in the first quarter of last year. The quarterly and yearly drops in the flipping rate marked the largest decreases since at least 2000. As the flipping rate dropped, both profits and profit margins also declined. The gross profit on the typical home flip nationwide (the difference between the median sales price and the median price paid by investors) declined in the first quarter of 2021 to $63,500. That amount was down from $71,000 in the fourth quarter of 2020, although still up slightly from $62,000 in the first quarter of last year. The slide pushed profit margin returns down, with the typical gross flipping profit of $63,500 in the first quarter of 2021 translating into a 37.8 percent return on investment compared to the original acquisition price. The gross flipping ROI was down from 41.8 percent in the fourth quarter of 2020, and from 38.8 percent a year earlier, to its lowest point since the second quarter of 2011 when the housing market was still mired in the aftereffects of the Great Recession in the late 2000s. Profits and profit margins went down in the first quarter as median prices on flipped homes decreased quarterly for the first time in two years. Homes flipped in the first quarter of 2021 were sold for a median price of $231,500, down 3.9 percent from $241,000 in the fourth quarter of 2020. That marked the first quarterly decrease in typical resale prices since the fourth quarter of 2018 and the largest quarterly decline since the first quarter 2011. The first quarter-of-2021 median, however, was still up from $222,000 in the first quarter of last year. Home flipping and profit margins dropped in the first quarter of 2021 amid an ongoing housing boom that spiked housing prices but created conditions less favorable for investors. Median values of single-family houses and condominiums shot up more than 10 percent across most of the nation last year as a rush of house hunters jumped into the market, chasing an already-tight supply of homes squeezed further by the Coronavirus pandemic that hit early in 2020. The glut of buyers came as mortgage rates dipped below 3 percent and many households sought houses as a way to escape virus-prone areas and gain space for developing work-at-home lifestyles. That price run-up also raised the possibility that home values during the housing boom, now in its 10th year, had increased to the point where they could flatten out during the roughly six-month period most investors need to renovate and flip homes. Two Perspectives “It’s too early to say for sure whether home flippers indeed have gone into an extended holding pattern. But the first quarter of 2021 certainly marked a notable downturn for the flipping industry, with the big drop in activity suggesting that investors may be worried that prices have simply gone up too high,” said Todd Teta, chief product officer at ATTOM. “After riding the housing boom along with others for years, they now might be having second thoughts. Whether this is the leading edge of a broader market downturn is little more than speculation. But ATTOM will be following all market measures very closely over the coming months to find out.” William Tessar, president of CIVIC Financial Services, offered this perspective: “Today’s report from ATTOM reflects an interesting shift occurring in the real estate investment space. With the recent runup in home prices, fewer first-time investors are able to enter the fix-and-flip arena. That doesn’t mean the fix and flip market is gone; in fact we’re experiencing record volumes with experienced investors continuing to do high-end flips. In addition, themarket for single-family rentals is off the charts, especially as more first-time buyers get priced out of the market and plan on longer-term rental strategies. Therefore fix-and-hold is a very lucrative space for real estate investors.” Home flipping rates down in 70 percent of local markets Home flips as a portion of all home sales decreased from the fourth quarter of 2020 to the first quarter of 2021 in 76 of the 108 metropolitan statistical areas analyzed in the report (70.4 percent). The rate commonly dropped from about 5 percent to 3 percent. (Metro areas were included if they had at a population of 200,000 or more and at least 50 home flips in the first quarter of 2021.) Among those metro areas, the largest quarterly decreases in the home flipping rate came in Memphis, TN (rate down 80 percent); Lakeland, FL (down 75 percent); San Francisco,CA (down 74 percent); Columbia, SC (down 73 percent) and Palm Bay, FL (down 73 percent). Aside from Memphis and San Francisco, the biggest quarterly flipping-rate decreases in 51 metro areas with a population of 1 million or more were in Dallas, TX (rate down 72 percent); Orlando, FL (down 71 percent) and Tampa, FL (down 69 percent). The biggest increases in home-flipping rates were in Springfield, MA (rate up 114 percent); Albuquerque, NM (up 103 percent); Springfield, IL (up 95 percent); South Bend, IN (up 86 percent) and Boston, MA (up 79 percent). ATTOM provides premium property data to power products that improve transparency, innovation, efficiency and disruption in a data-driven economy. ATTOM multi-sources property tax, deed, mortgage, foreclosure, environmental risk, natural hazard, and neighborhood data for more than 155 million U.S. residential and

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Walt and Gina York

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A Whirlwind of Events Leading to Success For North Carolinians Walt and Gina York, to say that 2015 was a whirlwind of life-changing events, would be an understatement! Walt and Gina, knowing they were going to get married, established GW Property Solutions, LLC in March of 2015 with the intention of flipping houses and holding rental properties. They   married in September 2015, bought a HomeVestors® (HVA) franchise in October 2015, started their HVA training in November 2015, and started their advertising in January of 2016. Prior to HomeVestors, Gina worked in the insurance industry and home-schooled her two children, and Walt was an independent marketing consultant. The couple purchased their first rehab from friends who happened to be HomeVestors franchise owners. Seeing their friend’s success convinced Walt and Gina to look at the HVA opportunity. The couple wanted to be independent business owners instead of working traditional corporate jobs. From day one with HomeVestors, Walt and Gina decided to forget everything they thought they knew about the real estate business and follow the trusted HomeVestors system and their faith in God.  As strong Christians, the GW Property Solutions foundation is firmly rooted in their Christian-based core value system.   The Growth of a Team In Walt’s words, they also knew that “it takes a village to build a successful business, and HVA is the best village there is.” They also humbly attribute their success to a great internal team. Walt and Gina look at their first full year (2016) as HomeVestors independent business owners as a “learning” year. In July of that year, they hired Kyle Maloney, who initially started with the company as a painter, as a buyer. They bought 9 houses.  At the start of their second year, they hired Mary Parrish as a coordinator, allowing Gina to focus on sales and Walt on lending. They also brought on Lawdy Oaster and David Kennedy as a part of their rehab and renovation team. The year ended with 38 houses being bought and sold. In their third year, Walt and Gina won the “Most Improved Franchise” award. Due to continued growth, they added Sherri Grant as a coordinator and elevated Mary to the position of business manager.  That dynamic team ended their third year with 56 purchases and the success continues today.  Another key component to their success was their HVA Development Agent, Jim Williams, and other franchisees who shared their knowledge and experiences. As pointed out, “We were buying into a family and not a franchise.” The Future Is Bright After just a few years, Walt became the Development Agent (DA) for the Greensboro, NC area. The DA program provides the necessary field support for both the new business owners as well as the seasoned ones. He is also the chairman for the FAC Technology Committee which works with the HomeVestors IT department to improve technology. The GW Property Solutions team is excited about the future. The real estate industry is in a “ultra-hyper” seller market allowing the team to sell homes for a lot more money. They also see adding more rentals to their ever-growing portfolio, envision more success, and most importantly, they see more joy in the days and years ahead. As they continue to grow and balance their portfolio between rentals and “buy-rehab-sell” properties, their advice to new HomeVestors franchisees is simple: commit to the business, commit to the system, and trust the HVA advertising programs. HomeVestors What exactly does it mean to be a HomeVestors business owner? Owning a real estate business is life changing and naturally comes with risks! When you become a HomeVestors business owner, you get immediate access to motivated seller leads, financing resources, one-on-one coaching with your local Development Agent, proprietary software for analyzing properties and deals, and access to a nationwide network of coaches and peers. Your house-buying business is yours and you run it as your own venture. If you are interested in a franchise, contact April Nealey at april.nealey@homevestors.com Each franchise office is independently owned and operated.

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Kairos Living

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Q&A with Phillip Yates, VP of Operations & Head of Leasing & Marketing How Technology Sets Us Apart from the Competition Q: To begin, tell me a little about Kairos Living? A: Kairos Living began operations in July 2019 based out of Chicago. We are a vertically integrated real estate company that handles all aspects of property ownership and operations from sourcing and acquisitions to renovations, leasing and property management. We currently operate in 17 states and over 60 MSAs with a portfolio fast-approaching 2000 single-family homes with more on the horizon. Our biggest market is Oklahoma City, followed by Amarillo, Birmingham, then Dallas. We are also in Houston, Atlanta, and Fayetteville, to name a few. Our approach to utilizing progressive technology eliminates the need for local offices allowing for more freedom to expand our target markets. Our remote structure also significantly reduces the overall cost of the operation. We run a lean but efficient staffing model with just over 40 employees. Q: How long have you been involved and focused on the New Construction niche of the industry? A: Our original sourcing strategy was based on the renovate-to-rent model. As the pandemic hit early last year, we anticipated and quickly shifted our approach to focus on new construction homes acquired through several strategic relationships with national and regional builders. Q: What attracted Kairos Living to New Construction homes? A: The appeal for new construction homes is four-fold. The ability to capture higher rent due to a more desirable product for renters, lower R&M and capital expenses with builder and manufacturer warranties in place, lower turnover costs with superior building products and workmanship, and lower property taxes initially captured. Q: How and when were you introduced to PlanOmatic? A: Our Leasing Manager, Elizabeth Erikson, had used PlanOmatic at a prior company with great success and knew they would be an essential partner for us to successfully grow our portfolio. Consequently, we have been using PlanOmatic since the start in 2019. We consider PlanOmatic a Premier partner. The team at PlanOmatic has been extremely engaged and very responsive with the continued expansion of our processes as we grow. They are eager to find new ways to personalize services, reduce turnaround time and provide a superior product for us to hit the market. We greatly value the impact they bring to our business and really see this as a long-term partnership for years to come. Q: Can you describe how you use the PlanOmatic technology, specifically the 3D Tours? A: We currently utilize the full stack of services from PlanOmatic to help run our business, from new construction inspections using Property Insights to dynamically marketing our homes with Interior/Exterior Photos, Digital Floorplans and of course 3D Tours. Marketing a home is a lot like selling a great novel; the goal when a reader picks up the book is to be drawn into the story and visualize themselves engaged with the content. The more dynamic and accessible the book is, the higher probability you will capture a sale. The same goes with property marketing. For most renters, the point of origin starts online when looking for a place to call home. As you compete against other products, it is crucial to utilize every advantage in your arsenal. 3D Tours with PlanOmatic has done exactly that for us; making a defining statement online and hooking the prospect to tour in person. We see a visible ROI from increased lead generation and overall app volume. Q: Is your focus on technology a key distinction between Kairos and your competitors? A: Yes. Kairos Living sees technology as a key path to achieve a competitive advantage and differentiate ourselves from other industry players by leveraging that tech in every aspect of our business, empowering us to abandon the traditional “boots on the ground” ideology and embrace more of a centralized operating model. Proptech is still young in the SFR sector, but we see that changing everyday with new and seasoned platforms that have been servicing multi-family for years gaining large appetites for SFR growth. Our centralized model allows us to be agile, presenting as the ideal group to partner with as these platforms present themselves. Kairos Living’s success will continue to go hand-in-hand with a culture of innovation and embracing new technologies all while still providing a great experience for our Residents. For more information, you can email Phillip at pyates@kairosliving.com or visit kairosliving.com.

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Increase Value of your SFR Portfolio with Rent Protection Insurance

Improve Your Bottom Line by Offloading Risk by Adam Meshekow Every real estate investor can recall with great clarity and detail a time when a defaulting tenant caused thousands of dollars in damage to an apartment or home rental. While infrequent occurrences, when they do happen, they can ruin an otherwise strong annual financial performance. In a year of unprecedented rent default and massive unemployment, missed rents and bad debt have reduced portfolio returns and humbled investors and operators alike. Furthermore, Rent Reform continues to gain traction across the country, with many sponsored bills coming to statehouse floors in the coming months. The CDC eviction moratorium—an extreme example of rent reform—may wind up costing owner/operators billions of dollars in lost rent. In the midst of all of this adversity, new and innovative rent protection products are helping to deliver economic value and true risk transfer to the SFR industry. Let us start with security deposits, which have been used for generations to limit the amount of risk that a landlord takes when renting out an asset. In most jurisdictions, landlords are required to follow strict rules and regulations governing how large of a deposit they can demand, how to hold cash deposits, and for what they can be used. The process of administering, accounting for, and returning security deposits represents a cost center for landlords across the country, costing $35-$60 per door per year to manage. Landlords have been self-insuring bad debt through the use of cash deposits for generations. This form of self-insurance is useful to cover a small loss or minimal damage to the asset, but fails to cover most losses resulting from skips and evictions, such as rent, utilities, late fees, legal fees, etc. Much of the innovation in rent protection and security deposit replacement insurance is being driven by rent reform. New rent reform legislation limiting the amount of cash deposits and requiring landlords to offer insurance alternatives has passed or will pass in cities such as Atlanta, Cincinnati, Baltimore, and New York. The good news: these new products truly are a win-win for both the operator and the resident. Residents are feeling the pinch from COVID-related loss of employment and reductions in income. Liquidity is at a premium today and residents are loath to fork over one month’s rent to a landlord and have it sit in the bank. Cash security deposits are a highly inefficient use of capital and a poor form of self-insurance when compared to these novel soft-capital products. Security deposit replacement insurance products allow landlords to enjoy as much and often more coverage than what a traditional cash deposit provides and allows the consumer to finance the cost over time by paying a low monthly fee. For example, let’s say the rent on a single-family rental in Florida is $1,800 per month and the landlord wants a $2,500 security deposit to cover damage, utilities, rent, and legal fees. In lieu of cash up front, the resident could pay roughly $25 a month in insurance premiums. Allowing the resident to pay overtime at a rate of approximately 1% of the cash security deposit per month is a true win/win for both the owner/operator and the resident. It gives the resident flexibility to move in without having to come up with all of the cash required, it saves the owner-operator around $50 per door in security deposit administration, and it allows the owner to have almost 50% more coverage in the event of missed rents and fees and damage. When applied across all properties, security deposit replacement insurance improves portfolio value by increasing occupancy, reducing vacancy loss, and improving overall NOI. Owners/Operators across the country are embracing this type of insurance technology across multifamily, student housing, and single-family rentals to boost NOI as much as $900,000 per every 1,000 doors. There are not many products out there that can have this type of impact on your bottom line by offloading the risk to someone else so you can focus on growing the value and operations of your assets.

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Single Family Rental Strategies in a Hot Market

Act Quickly, Honestly, and Decisively by Adam Stern The residential housing market is HOT. Inventory is down in all major markets acrossthe country, prices have risen precipitously for consecutive years since the late 2010’s, and the influx of capital into the rental housing space has been steady and ever increasing. Low inventory, cheap money, and the driver? People are renting homes at a faster pace than ever before. The confluence of these market factors could make it hard for incumbent firms with existing rental property assets to acquire new homes and make it difficult for newly emerging investment firms to find an entry point into the asset class. It all comes down to strategy. As a broker that has been focused on identifying capital sources active in the Single-Family Rental space and, on the flip side, identifying, engaging, and servicing those who own, manage and build rental housing, my firm, Strata SFR, has a unique perspective of the various strategies that firms employ across the country. Since Strata does not generally act as a principal in transactions, the velocity of our movement in the space is extremely high vs investment firms that generally stick to a single strategy for buying and/or selling.  Strategy of the Biggs Incumbent firms that have been in the space since the downturn in 2008, many of them public REITs and privately held real estate investment companies, are a good place to start. Their strategies generally have to do with building onto existing footprints, growing market share in the areas they currently operate, pruning their holdings to create higher margins through improving operational efficiencies, and in some cases breaking into new markets while leveraging existing infrastructure. Firms who do not have the scale that these bigger companies possess may think that their tasks are somehow easier than firms that are just starting out, but I find generally it is quite the opposite. After all, once you set the level at which revenue is generated from owned assets, there is only one direction these firms can move to keep investors happy and coming back and keep companies thriving. If progress is not made through continual revenue growth, the market tends to notice. Lots of attention means a higher level of scrutiny from all sides. Forward progress is the only surefire way to ensure long term survival. When my company is engaged by larger firms with existing portfolios, it is generally geared toward the disposition of assets no longer viewed as essential to their long-term strategy. That means pruning existing holdings to redeploy capital into areas that have a better opportunity for future growth. The strategy is to sell those assets and move capital into higher growth areas, including transitional areas, where inventory is of lower cost and higher yielding or where the acquisition of new assets is easier to come by due to higher availability or lower competition. Very often assets are sold to other firms with a more regional focus thereby allowing competing firms to grow to scale. Many firms opt to add new build strategies in areas where one-off or portfolio acquisitions are harder to come by. This strategy, Build-For-Rent, is a longer and more involved way to eventually own and operate assets at the end of the process, but the benefits of venturing into these types of deals provide a huge long term competitive advantage. While cash flow is further out than buying existing assets, often the price that firms pay, on a per asset basis, is lower and at the end of the process, they own a new home that will appreciate faster in a rising market than older homes. An added benefit of moving into the new build space is the experience and know-how achieved buy completing such transactions. Once you have the infrastructure to source land or lots and the resources to erect new communities, the barrier to entering new areas of existing markets or new markets all together with a Build-For-Rent strategy are much lower than competitors without such experience. Once these firms learn how to ride that bike, that skill set cannot be unlearned, and the benefits of this acquired ability will pay dividends for years to come. Strategy of New Firms For newly minted firms, raising capital, whether easy due to reputation or contacts or hard due to lack of experience, is seen by many who have raised it as the easier part of the equation. Once capital is committed, then comes the challenging part of choosing markets, setting up acquisition and sourcing channels, and managing assets. Many firms coming from alternate asset types such as multifamily are making the switch, looking to use their resources to address the challenges of entering the Single-Family Rental space.  At Strata SFR, we love these new firms. They provide an opportunity to source brand new large and medium sized portfolios from some of our smaller regional investment clients looking to exit in a seemingly overheated market. The way these relationships often play out is, the firmidentifies a market or markets they are bullish on; we identify the largest owners of SFR in those markets; and approach them with an exit opportunity. For many owners, the presence of these new buyers is a welcome site as they give smaller operators a path to sell their portfolios at an attractive price, in one transaction, to one buyer. The ability to bring to the table a buyer with deep pockets, a relatively low Cap Rate threshold, and the ability to take down large numbers of rented houses is enough to get an opportunityon the table for our new fund clients. Once an initial portfolio trade happens, setting upon the task of helping these new funds build on early success is the next stage. Often this entails helping them create on-market acquisition strategies or connecting these firms with land developers and builders to build single-site communities. Whatever the method, the goal is clear: fast growth, rapid capital deployment into assets that will deliver a

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Why House Prices Beat the Pandemic Odds

…And Why So Many Housing Economists Got It Wrong by Brian Fluhr One year ago, at the onset of the Coronavirus pandemic, housing economists were making dire predictions for the market. The demise of housing did not play out the way many anticipated for several reasons but foremost because strong economic housing fundamentals were already in place pre-pandemic. These fundamentals included the durable credit of borrowers, balanced debt-to-income ratios, and reasonable loan-to-value ratios. Homeowners today can withstand the crosswinds of a temporary loss of income because many homeowners have a much healthier balance sheet than homeowners had during the Great Recession—by some estimates, $7 trillion in home equity across the country. The equity well reportedly increased by 16.2% year over year in the fourth quarter of 2020. In that estimation, the equity gain was more than $1.5 trillion. Federal policies enacted since the pandemic began helped provide additional stability. For instance, the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020, injected relief. This included expanded unemployment benefits, foreclosure bans, and student loan forbearance. COVID-19 hardship forbearance was extended to those hit by the pandemic, which had a federally backed mortgage. So why did so many economists predict a home price collapse as a result of the pandemic? Anxiety ensuing from the wave of job losses that followed the shutdown is in part to blame. The Jobs Impact Ordinarily, widespread job loss is associated with housing insecurity. By the fourth quarter last year, figures from the Federal Reserve Bank of St. Louis showed that despite some improvement in the economy, “heightened unemployment and economic uncertainty could continue to affect the housing market through 2020 and beyond.” The bank referenced the 2007-09 financial crisis when foreclosures and tighter lending practices locked many out of homeownership for several years. “There are signs of these long-term effects again,” they added. However, the types of jobs lost were highly concentrated among lower-to middle-income workers, heavily impacting individuals in the decimated service industry who are more likely to live in rental units. An April 2020 report from the National Bureau for Economic Research elucidates this point. It found that 37% of jobs in the U.S. can be performed entirely at home, establishing that these occupations tend to be higher paying than those that cannot be performed in a home setting. Additionally, these jobs “account for 46% of all U.S. wages.” Veros Got It Right High-profile observers of the housing economy predicted that the market would depreciate annually due to the pandemic, with forecasts of prices dropping 6.6% by the early part of 2021 in one instance and between 0.5 and 2.5% from October 2020 to July 2021 in another.  VeroFORECAST, however, predicted that the global pandemic would only have a brief impact on housing prices. After one uncertain quarter, Veros stood tall by predicting that programs and policies implemented in the wake of the Great Recession would lead the market to return to pre-pandemic levels very quickly. At the close of the fourth quarter of 2019, predictions were buoyant over what was to come in 2020. In its Q4 2019 VeroFORECAST, the company predicted an average increase of nearly 4% by the fourth quarter of 2020. This projected increase was based on data from 332 Metropolitan Statistical Areas (MSAs). At the time of its release, in early January 2020, Eric Fox, Veros’s vice president of statistical and economic modeling, cited sound economic fundamentals, low interest rates, and strong levels of employment as indicators of moderate home-price appreciation “with very few geographic pockets of weakness.” When data from the first quarter emerged in April 2020, Veros Real Estate Solutions projected that home price increases would pause for only one quarter. Home prices rebounded throughout the subsequent quarters of the year. In Q1 2020, VeroFORECAST data indicated an average projected appreciation rate increase of on average 1.9% through the first quarter of 2021. During 2020, there were two notable, competing scenarios at play. On the one hand: historically, low-interest rates stimulate demand and increased prices. On the other: rapidly rising unemployment and quickly falling GDP, both of which were turbulent but did not faze the housing market for the whole year, as others had predicted. Veros correctly indicated that there would be only a mild home price depreciation at the start of the pandemic, with a return to normal appreciation rates later in the year and into 2021. As such, in March 2020, Veros said that in the first quarter of 2020, prices would depreciate by 1.1%, then the real estate economy would recover, and by the first quarter of 2021, prices would return to pre-pandemic appreciation levels of about 1% per quarter. This forecast was in line with previous projections indicating positive average home price appreciation, despite pandemic-related economic uncertainty and unemployment, particularly in the leisure, hospitality, and tourism industries. The themes that Veros would point to early on started to take shape in subsequent quarterly reports. “This quarter’s forecast indicates significant home price appreciation from what we just experienced in the first quarter of 2020,” Fox said in early July. “Despite the devastating economic, social and health impact resulting from COVID-19, the overall average annual appreciation rate increased to 3.5% vs. 1.9% from the annual forecasted rate last quarter.” The return to house price increases presents a paradox: Despite the naysayer predictions, appreciation strengthened beyond the levels witnessed before COVID-19 curbed economic activity. One catalyst was what has been dubbed “COVID migration.” That is where those jobs that can be effectively performed at home take center stage. As soon as large tracts of the population realized that they could move their entire lives even significant distances from where they previously commuted to work, an exodus from key market areas started to occur. To be sure, the pandemic migration phenomenon is real. Places such as Boise, Idaho, and Spokane, Washington, continued to see a pattern of rising prices throughout 2020 and into 2021, while many urban centers across California saw

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