REI INK

The Fix & Flip Investment Niche

Profiles of Seven Fix & Flip Investors and Their Specific Markets By Carole VanSickle Ellis Fix-and-flip real estate has never been higher profile than in 2022, when “property porn,” algorithm-driven bulk purchases, and reality real estate television have taken a pandemic-lockdown-fueled center stage in the public consciousness. However, while more people are thinking about “flipping” than ever before – either because they are worried that cash buyers will price them out of the competitive market or because they want to get in on the action themselves – fix-and-flip profits are falling. According to data released by real estate analytics firm ATTOM Data in July 2022, profits on fix-and-flip deals have hit 13-year lows despite about one in every 10  home sales being a flip during Q1 2022.  “When flipping, it’s all about the numbers,” explained Paige Panzarello, a California-based investor known as the Cashflow Chick who focuses primarily on non-performing notes but also collaborates with other investors and sometimes flips properties herself. “A lot of people love to create things that are beautiful from something that is ugly — myself included — but watch the numbers closely,” she continued. “Investors know you make your money when you buy the asset and you collect it when you exit the project. The market is changing quickly right now, and that is something every flipper is watching very closely.” Due to rising materials and labor costs as well as supply-chain disruptions, the fix-and-flip process is evolving with exceptional speed in today’s economy.  However, for experienced and determined flippers, things are just getting started. This month, REI INK spoke with fix-and-flip investors operating in markets across the country to get an idea of how this element of the real estate investing industry is evolving and what investors should expect in the months to come. » Greater Atlanta, Georgia Growing with the Pandemic “Reset” Featured Investors // Kathryn and Britt Harbour Atlanta, Georgia, has been known as “Hotlanta” since the 1950s, and the southeastern city has a tradition of constant growth and expansion. John Ryan, marketing officer for the Georgia Multiple Listing Service (MLS), described it as “such a transient town [where] there are always people moving in who need housing.” Because the Greater Atlanta area extends outward into 11 counties and continues to extend, fix-and-flip investors in the suburbs have found the home to the world’s busiest passenger airport and 16 Fortune 500 company headquarters an ideal market in which to operate. Since the advent of the COVID-19 pandemic, Atlanta has benefitted from remote-work trends, a relatively lower cost-of-living compared to other metro areas of its size, and proximity to the single largest and fastest-growing container terminal in the country, Georgia’s Port of Savannah. Suburbs like Kennesaw, Marietta, and Acworth, where Kathryn and Britt Harbour have been flipping properties for more than a decade, are growing faster than ever in 2022. “Since COVID-19, there has been a reset going on as people move here from New Jersey, Michigan, Illinois, and California,” said Britt, noting that increased buyer activity is driving suburban prices skyward. In Kennesaw, for example, home prices were up more than 20% year-over-year. By the same measure, the volume of homes on market in June was down nearly 30%. A Market Ripe for Creative Deals For flippers like the Harbours, these numbers are staggering but manageable because they have been working in the area for quite some time. Additionally, Kathryn is a realtor and specializes in the historic and semi-historic flips that make Harbour properties uniquely appealing to sellers. The couple recently flipped a commercial property just off Marietta’s historic square that involved working with the seller to rezone the property before the purchase. The building was in terrible disrepair, with massive termite damage to the original structure and updates that Britt described as having been “made here and there, using whatever materials were available, for the last 100 years.” Despite the challenges, the Harbours were able to renovate the building and get it under contract quickly. Kathryn noted one advantage of flipping commercial buildings in today’s market can be the higher numbers these properties usually bring to a sale. “With residential fix-and-flip deals, you must always consider the appropriate ARV for the area,” she explained. “If you need to put in a $100,000 kitchen but you are not expecting to sell for more than $500,000, that makes your budget very tight [in SFR deals],” she explained. “In a commercial building, especially if you get a great deal like we did, you can go in and make it a labor of love.” That labor of love paid off in large part because the Harbours, like many active fix-and-flip investors, have an extended and long-lived network in their area. “We were able to buy the property because the owner knew us, and we did a lot of the work on it ourselves or with contractors we already know and trust,” Kathryn said. “We are always looking for properties that are off market, talking to tons of potential sellers, and if we really like a deal, we keep it.”          Massachusetts A Market Like No Other Featured Investor // Tom Truong As recently as the end of June, analysts were wondering aloud if the Massachusetts real estate market might tumble later in the summer while also speculating the market might just keep heating up. It was hard to blame them for their uncertainty; a 12.4% year-over-year increase in the statewide median sales price in May and two-year leap of 38.8% made it hard to see dark clouds on the horizon. However, falling sales volumes and steep competition were already complicating transactions, and investors like Tom Truong, an eXp Realty team leader and influencer, could tell that the coming months would reward investors with specialty strategies and the resources to generate and convert leads on deals. As far as flipping goes, Truong said, the Greater Boston area is still experiencing strong levels of activity for experienced investors willing to dedicate their resources to generating

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THE CHALLENGING ROAD AHEAD?

The Bottom Line is the Bottom Line By Rick Sharga The fix-and-flip market hit what was probably an all-time high in the first quarter of 2022. According to ATTOM’s first-quarter 2022 U.S. Home Flipping Report, 114,706 single-family houses and condominiums in the United States were flipped in the first quarter, representing almost 10% of all home sales in the quarter — the highest level since at least 2000. The first quarter total was up from 6.9% during the fourth quarter of 2021, and from 4.9% in the first quarter of 2021. The jump in the home-flipping rate during the first quarter of this year marked the fifth straight quarterly increase. It also represented the largest quarterly and annual percentage-point gains since 2000. Conditions in the housing market for the past two years have been ideal for fix-and-flip investors, who traditionally do very well when conditions include high demand from homebuyers, low supply of homes for sale and rapidly rising home prices. All three of those characteristics have been in abundant supply over the past few years. Demand was driven largely by demographics as the largest cohort of Millennials (the largest generation in U.S. history) has crept closer to prime homebuying age. Homebuilders have grossly underbuilt since the end of the Great Recession, leading to an historic undersupply of housing. This supply and demand imbalance led to rapid home price acceleration. The COVID-19 pandemic actually accelerated some of these trends: the Federal Reserve acted to keep interest rates lower in order to bolster the economy through the pandemic-driven recession, leading to the lowest mortgage rates ever recorded, further fueling demand. Prospective homebuyers leapt at the chance to become homeowners because of how affordable these interest rates made homeownership. People having the newfound ability to work from home fled from rental properties in high cost, high tax cities to buy houses in more affordable locations. All of this activity exacerbated the supply/demand imbalance and drove home price appreciation into the high double-digit range (over 40% annually in markets like Boise, Idaho and over 30% in St. Georges, Utah) with little impact on affordability because of the low mortgage rates. High demand. Low supply. Rapidly rising home prices. A perfect scenario for flipping. But if you are a fix-and-flip investor, hold off on popping that champagne cork just yet, especially if you are just getting started in the field. It is possible that the first quarter numbers represented a peak for this cycle rather than heralding an even stronger market yet to come. There are several possible storm clouds on the horizon for flippers, and they all bear watching. Profits and Profit Margins are Shrinking While the ATTOM report highlighted the dramatic increase in the number of properties flipped, it also showed that as home sales by investors spiked, the gross profits on those deals remained below where they were a year ago, and in a more striking trend, profit margins dipped to their lowest point since 2009. Among all flips nationwide, the gross profit on typical transactions as reported by ATTOM (the difference between the median purchase price paid by investors and the median resale price) stood at $67,000 in the first quarter of 2022. While that was up 5.5% from $63,500 in the fourth quarter of 2021, and represented the first increase since late 2020, it was 4.3% less than the $70,000 level recorded in the first quarter of 2021. Profit margins, defined as the gross profit divided by the original purchase price, fell for the sixth quarter in a row, as the gross flipping profit of $67,000 in the first quarter of 2022 translated into just a 25.8% return on investment compared to the original acquisition price. The national gross-flipping ROI was down from 27.3% in the fourth quarter of 2021 and from 38.9% a year earlier. It sat at the lowest point since the first quarter of 2009, when the housing market was slumping from the effects of the Great Recession in the late 2000s. This return on investment also was less than half the peak of 53.1% for this century, which hit in late 2016. Gross profits and profit margins declined despite record sales prices on flipped properties — the median price of homes flipped in the first quarter of 2022 increased to another all-time high of $327,000. That was up 10.5% from $296,000 in the fourth quarter of 2021 and 30.8% from $250,000 a year earlier. Both increases stood out as the largest for flipped properties since 2000. So how could profit margins decline even as resale prices on flipped homes continued to shoot up? Essentially, fix-and-flip property prices appreciated more slowly than investors had anticipated when they purchased them. Rising mortgage rates are beginning to slow down home price appreciation, and buyers have become more selective – and less willing to outbid other buyers for properties. This is having a predictable impact on profit margins for investors. Not included in the ATTOM analysis — but putting even more pressure on flipping profits — are the rising costs of materials and labor. Limited availability of both labor and building materials is also extending the time needed to make repairs, which is likely increasing holding and financing costs for investors. The bottom line is that the bottom line is getting tighter, and fix-and-flip investors need to sharpen their pencils when it comes to valuing a property and estimating repairs in order to avoid a financial catastrophe. Demand Appears to be Weakening Rising costs and slowing home price appreciation are worrisome, but what about the buyers? From all indications, demand is beginning to weaken pretty significantly: »          May marked the tenth consecutive month of existing home sales being lower than the prior year’s and the fifth consecutive month of lower sales than the prior month »          Pending home sales — an indicator of future closings – has declined on a year-over-year basis for 12 consecutive months »          The Mortgage Bankers Association Purchase Loan Application Index, which tracks how

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How to Win in Today’s Fix & Flip Market

What Today’s Buyers and Renters are Looking For By Jamie Rey-Hipolito Fix-and-flip investors have been faced with more than a few challenges over the past year. From the rising cost of materials to the availability of inventory, these compounding stressors on an investor’s bottom line have caused some to scale back or pause operations completely. However, I am in the camp that the fix-and-flip market is ripe for opportunity if investors can get a little creative with their approach. I have been fortunate to work in this industry for more than 20 years, cutting my teeth in real estate operations and asset management in the single-family, multifamily and iBuyer asset management space, and have witnessed a lot of change in that time. I have worked for large investors with thousands of properties in their portfolios and have learned a thing or two about what works and what doesn’t when it comes to maintaining profitability on a fix-and-flip project. While much has changed, one thing that has remained the same is the importance of knowing your customer. Putting yourself in a homebuyer or renter’s shoes, doing your research and understanding their needs is crucial as you make key decisions about your flips, considering what is going to generate the largest return on your investment (hint: it is not extensive landscaping or fancy light fixtures). And, as the younger generations — Gen Z and millennials — reach their peak homebuying age, considering generational differences is not a bad idea either. The market is shifting With mortgage rates increasing, and inventory ticking back up steadily, we can expect that the bidding wars we witnessed in the early days of the pandemic — and homes going for two or three times the asking price — is not going to be as prevalent moving forward. Additionally, waiving inspections and contingencies is another thing that is going to become less and less common. As experts watch the market closely, many feel we are returning to more of a pre-pandemic housing market. That is not to say, however, that the market is not still “hot,” but we must not rest on our laurels and rely solely on the hot market driving purchases any longer. Going “back to basics,” while still keeping-in-mind emerging housing trends and consumer desires, is always a good idea. Evolving desires Investors today must be mindful of just how much consumers’ lives have changed since the onset of the COVID-19 pandemic. How we live, work and play has been forever altered. That means doing your research and knowing what today’s buyers and renters are looking for in a home is more important than ever. Young people have especially strong feelings about what they are looking for in a home, which is driving many of the trends we are seeing today as investors and builders look to adapt. Speaking to some of these desires, my company, ServiceLink, recently surveyed 1,000 recent homebuyers from across the U.S. to get their pulse on the state of homebuying today and gauge how they were adapting to the white-hot real estate market. What we found, particularly among millennial and Gen Z respondents, was that they remain optimistic about purchasing a home this year and are increasingly looking for more space to work and play as they continue to work remotely. For example, 26% of Gen Z/millennial respondents stated they were likely to purchase a new home this year; 42% stated their reason for buying a new home was to upsize from their current one; and 17% stated they bought a new home for more space to work remotely. Speaking to the rental audience, they are looking for much of the same, and still desire amenities like walking paths, on-site pools and clubhouses for SFR communities — all the same things they may have enjoyed with apartment living. Proximity to the office is much less important to consumers as it was three or more years ago — as evidenced by some of the recent migratory trends from city hubs to more rural areas — and while some are returning to the office full-time, a hybrid approach to working is likely here to stay for many. These trends will continue to impact what buyers and renters are looking for in their next home. Making sound decisions that appeal to younger buyers and renters Here are six things today’s buyers and renters are looking for, that every fix-and-flipper should keep-in-mind on their next project: A touch of automation While it is important not to go overboard with tech upgrades — as technology can become obsolete when new products are rolled out — there are smaller upgrades you can make to a property that will be attractive to new buyers or renters. For example, motion sensors for lighting, hands free faucets, automated or smart alarms, door locks and climate control systems are all upgrades to consider that will appeal to consumers today, but will not break the bank. Keep it neutral Choosing a neutral color palette is always a safe bet for any fix-and-flip project. This allows homebuyers or renters to put their own personal touch on a property when they move in — if desired — and helps them better visualize themselves in the space. Keeping it neutral and resisting the urge to lean into your own design preferences can help your property appeal to the masses instead of a small handful who appreciate your artistic flare. Think twice before opening up a floor plan While open floor plans have been all the rage for the past few years, the appeal may be waning for buyers and renters who are working from home and need dedicated sections of their home to double as offices. There is another bright side to this waning interest in open concept living, too: it is a cost saver, and investors and builders are not having to deal with the permitting issues that knocking down walls may bring either. Win/win. Be open to alternatives Because materials are

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Challenges in the Current Investment Market

Planning and Flexibility Can be the Keys to Success By Bryan Lysikowski As the market continues down the path of post-pandemic life, the single-family rental and investment sector continues to face unprecedented challenges. When looking at the current market challenges, it is easiest to break them down into three main categories: »          supply chain issues »          labor issues »          cost issues At times, depending on the market, these issues can compound on one another to create delays and cost increases that can erode into your profitability. As with any real estate project, extra planning and flexibility can help mitigate some of these issues. As you take a deeper dive into the core cause of some of these, it becomes clear investors today have increasing challenges coming at them from all directions. Supply Chain Issues The boom in post-pandemic construction, combined with the ongoing issues with manufacturing and transportation, has plagued almost all areas of construction with material shortages and availability issues. Even when able to source and secure materials for projects, contractors are still experiencing significant delays in lead times and delivery. If you have been involved with any construction projects throughout this year and last, undoubtably they were plagued with material shortages and delays in everything from replacement windows to drywall to electrical supplies to cabinetry, just to name a few. In a recent conversation with Granite Creek Cabinetry’s Senior Vice President, Ryan Smith, he cited increased lead times due to labor shortages and continued pandemic shutdowns at the factories overseas combined with shipping delays as the number one cause of increased timeframes for their product line. According to the National Association of Home Builders, the shortages of materials are more widespread than at any previous time since they began tracking the issues in the early 1990s. Labor Force Issue As investors continue forward trying to solve for supply chain shortages on materials, we are also faced with a domestic labor shortage. Everyone at this point has encountered workforce shortages in almost everything we do from grocery shopping to a family vacation, and the construction industry is not exempt from these issues. In the construction industry, the labor shortages are more heavily directed toward the skilled trades, however even entry level positions go unfilled. Currently, the largest shortage of skilled tradesmen is electricians followed closely by plumbers. Data collected by the Associated Builders & Contractors Organization cites that the construction industry has an immediate need in excess of 650,000 workers over and above its normal pace of hiring in 2022. This problem has been exacerbated post-pandemic by a generation of older skilled tradesmen that have opted for early retirement in the shadow of the pandemic. This, coupled with our societal push for a college degree and the reduced enrollment at trade schools, is only making the shortage worse. At the current pace, those skilled trades are retiring at a much faster pace than those being trained to replace them. The need for a new generation of skilled tradesmen has never been higher than it is today. In an industry where you could count on renovation timelines of roughly one day for every $1,000 of spend, expectations have now dropped down to around one day for every $700 you spend. From an industry perspective there is no sign that this problem will be easing any time soon. Cost Issues The third major issue single family rental investors are facing in the post-pandemic market is the cost of materials and the effects of all time high inflation. According to a report released by the Bureau of Labor Statistics, there has been an increase of 8% for goods used in residential construction since the beginning of this year. Building materials have increased 20.4% year-over-year and have risen 33% since the start of the pandemic in 2021. This report also cites a 15.2% increase in services used in residential construction (tradesmen, transportation, and warehousing) since the beginning of 2022. Service costs have increased 18.5% year-over-year, and 39% since the beginning of the pandemic. As the Federal Reserve continues to increase interest rates, demand for these materials will soften and should result in some pricing relief. Unfortunately, overall higher cost of goods and services are here to stay for the time being. Identifying these core issues is only half the battle; implementing changes in how your organization manages these challenges is where some are missing out. A single-family rental investor ignoring these market challenges and continuing to follow their original model without any modification is a big mistake. These issues must start being addressed in your core investment model and accounted for during the due diligence phase of acquisition if you wish to remain profitable and successful. If these factors are overlooked in the foundation of an acquisition, you will certainly lose valuable margin or possibly even produce a loss. Investors must account for the increases in material and labor cost, as well as increased carrying costs associated with a longer construction process. Those investors who have stuck to their original models, pricing lists, and material selection are the same investors who cannot get their properties market-ready and are plagued with sub-par quality of work. Investors who have adapted to the current market conditions by adjusting their repair budgets and allowed for alternate material selection are having the most success in getting their properties market ready in a timely manner. Flexibility is another key component to overcoming these struggles. Having flexibility with your contractors in material and product selection and allowing them to be an integral part of the overall process, will pay tremendous dividends. If you have the right partners in place on the construction side, you will usually experience a seamless transition into material changes that will still add value and ultimately help curb delays that may be caused by material selection. Even with all these challenges we are still in a hot real estate market throughout the country. As climbing interest rates may soften the markets to some degree, this

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The Fix & Flip Boom

Popularity and Opportunity By Mitchell Zagrodnik In the real estate investment space, there are a variety of avenues one can take to turn a profit on a deal. At the end of the day, what makes an investment worth your time, as well as your money, is the overall return on investment. The ultimate goal is to come out of the deal with more money than you put in. Today, one of the more attractive endeavors investors are taking in order to turn a profit is to purchase an undervalued or run-down property, fix and repair it, then sell the newly renovated property for a higher price. This method is known throughout the industry as the fix-and-flip method. Popularized by HGTV reality shows like “Property Brothers” and “Flip or Flop,” fix-and-flips have become the captivating trend in the real estate world, and a great launchpad for aspiring entrepreneurs looking to break into real estate investing. While fix-and-flip is not a new real estate investing strategy, the current marketplace offers increased opportunities for investors.  If you have not yet considered flipping, it is certainly a good time to look at it from a fresh perspective. The Entrepreneurial Angle The entrepreneurial angle to fix-and-flips is one of the more attractive aspects of the idea. People view the flip business as an exciting opportunity to start their own business and be their own boss. Working for yourself and on your schedule is enticing to individuals in today’s working climate, and anyone with a strong work ethic and networking ability can ultimately pursue and succeed in starting a fix-and-flip business. Even in a space that is growing in popularity and becoming more and more competitive, there are always opportunities for investors to make a splash. Fix-and-flips are so popular now because when done well, they offer high profit margins and can be done in a short amount of time. Speed is the key, both in how you, the investor, get paid but also because the faster the property is sold, the less you pay in interest, and because of that the profit is higher and you can get started on the next deal. The market is there for investors to take advantage of because there will always be buyers, and often, these buyers want to move into a home that does not require them to do any renovation themselves. Know What You Are Getting Into Fixing up a property is not an easy task. There are many factors to consider. The goal is to make renovations that are going to increase that property’s value, whether that is spending money on a new plumbing system or adding a backyard patio using pavers. Having a plan and crunching the numbers is an integral part of turning a profit on a fix-and-flip. When watching the process of these flips on TV, it is easy to sit there as a viewer and say “Hey, that doesn’t look so hard, I can do that,” without fully realizing everything that goes into it. At the end of the day these shows are for your entertainment, so they tend not to show the challenges of the market. Finding the right house, paying for it, and finding the right customer to sell to are a few of the issues these investors can face. With the massive increase in flips going on throughout the country, the opportunity is there for people looking to break into the business and begin their fix- and-flip journey. It is important not to bring a sense of naivety to these projects, so even though they look like quick and fun projects that can lead to massive profits on TV, there is much more that goes into the process. Growing Popularity = More Competition As exciting of a venture fixing and flipping properties can be, the growing popularity and competitive nature of the business can also have its downswings too. You get into something just before it becomes popular, and then after a certain amount of time, everybody is doing it. There are always opportunities for investors that are willing to look, but as the old saying goes, “Timing is everything.” An article written by Diana Olick from CNBC in late December of 2021 directly mentions that the house-flipping market is getting more competitive, while profits are also going down on these deals. Olick states that in late 2021, return on investment on fix-and-flips fell to 32%. Surely, a sharp drop from 2020, where the average return was nearly 44%. Getting into this business pre-pandemic allotted investors various property options, as well as low interest rates, so they can buy these properties, fix them up quick, and then sell them for a nice profit. Now what exactly is factoring into there being less profit? The answer can be attributed to rising interest rates, increased material costs, and frequent supply chain delays. Because of these factors in the market, the investors are having to hold these properties for longer. However, even though the popularity has grown, and the space has become more competitive, there is still profit being made on these deals. It is no secret that 2022 rates are high, and it is fair to say the buyer’s market will potentially shrink again. For investors, the opportunities are out there, and they can make their mark in the industry in times like this while others are backing off. Despite the challenges in recent months, a 30%+ return on investment is still strong. Ample Opportunities Fix-and-flip investing continues to be incredibly attractive in today’s market. When considering the changes in the market, this can still be considered an exciting time to get into fix-and-flip investing. Even with rates rising, these fix-and-flip deals may take anywhere between three and six months, meaning you might only be paying interest on the property within that period anyway. Markets like these come around every so often, and there are buyers who are understandably cautious to dip their toes in. However, there are also

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