Riding the Market Wave
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 above
list 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 that
optimistic speculator in Jupiter, Florida looking for a $6 million payoff after 48 hours. In this
market, stranger things have happened.
