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 “a constant flow of leads and constant marketing” for those leads. Truong did his first flip in 1994, is counted among eXp’s “top 0.001% influencers, and is a strategic thought leader in the Massachusetts real estate community.”
Truong said his favorite and most successful flips tend to be those that other investors might not be able to handle, such as older homes found in the area that tend to be alien to new and non-local investors.
“Everyone thinks they can flip a house today, and sellers have unrealistic expectations [about purchase prices],” Truong explained. “When a buyer finds out a property was built in 1875, not everyone can handle that. Flippers in particular are now in a position where they must reeducate sellers that their expectations were unrealistic.”
Unique Elements Offer Challenges, Advantages for Experienced Flippers
Truong noted that the Massachusetts market is unique not just because of the age of much of its inventory, but also because zoning and regulations vary dramatically from town to town.
“There are state codes, but local codes trump them,” he said. “If you have done a flip in northern Massachusetts, Boston Proper or the southern part of the state will be different worlds for you in terms of zoning, permitting, and labor.”
Because of his familiarity with the local market, Truong often simply opts out of bidding on “vanilla” properties that appear to be straightforward flips from start to finish.
“These projects may take six months and may make $20,000,” he said. “By that standard, I would go out of business.” Truong’s formula revolves around paying no more than 70% of after-repair value (ARV) minus cost of repairs/construction, slightly more than he was willing to pay in 2017.
The cost of labor varies greatly across the state, which can be a pitfall also.
“Put a pin on a map anywhere in Massachusetts, and the cost for a trade can vary up to 25% within a 45-minute drive in any direction,” Truong said.
On the upside, an investor who finds contractors willing to travel may be able to reap rewards in terms of speed to completion since many are willing to work longer days in order to save money on gas.
“You have to have someone in this market working with you if you want to succeed,” Truong concluded. “I’m bullish about this market and I know it well.”
Southeastern Coastal
The Coast is Attractive. Now More Than Ever
Featured Investor // Charles Sells
By the end of 2020, it had become evident that the COVID-19 pandemic would have lasting and arguably irreversible effects on the nation’s home-buying preferences, a fact that was particularly relevant to temperate markets located within a few hours’ drive of a coastal location.
In October 2020, Forbes contributor Peter Taylor observed after a self-described “deep dive” into recent real estate trends, “No matter who I spoke with, a few words kept resurfacing…warmer, safer, smaller, stabler, lower taxes, less regulation, and fewer lockdowns.” This describes the southeastern coast of the United States to a tee, and the market heated precipitously in spring of 2020 and has remained white-hot ever since.
The growth of eastern coastal real estate markets was not just astronomical; it was also fast. According to Realtor.com analysts, since 2020 American homebuyers have been making moves faster than ever before, thus
accelerating growth for in-demand markets and driving down inventory while driving up prices. It would seem this would be the perfect environment for a fix-and-flip investor.
Making the Most of the “COVID Swing”
“The ‘COVID swing’ in our markets started early when everyone started moving toward the southeast,” reported Charles Sells, whose company, PIP Group, has been active in both Charleston, South Carolina, and Savannah, Georgia, for more than two decades providing investors with opportunities to acquire and fix up properties as long- or short-term rentals or for sale.
“The issue, of course, has been that inventory has been pretty hard to come by,” Sells added. His company began buying up historic and dilapidated properties mainly in Savannah, making good margins on the flips because of skyrocketing appreciation and buyer demand in the area.
Savannah, Georgia, and proximal markets near the southeastern barrier islands benefit from the combination of a strong and varied economy that combines tourism with many other attractive business sectors and locations relatively close to the Port of Savannah.
“We are bringing in new jobs, new development, and there are so many opportunities in this market for short- and long-term rentals and flip sales; there are a lot of good things going on,” he said.
Corporations that require on-site workers are also realizing the benefits of locating in an area that is attractive to workers as well, and coastal cities willing to incentivize businesses to make the move are benefiting. Savannah has a variety of economic and tax incentives for incoming businesses.
“Hyundai just announced a $5.6 billion investment for a battery electric vehicle plant, and those workers will all need housing,” Sells said.
Sells is not expecting a wave of foreclosures during the next housing correction, so fix-and-flip investors should expect to continue to work hard to generate leads for deals and not fail to account for inflation in their calculations.
“The market has softened a little bit, and they say we are in a stagnation phase right now. The next step is recession,” Sells observed. “It just means we will be back into a buy-and-hold situation instead of buy-and-sell for a while, but that is part of the game.”
South Bend, Indiana
Facing Reality With Cautious Optimism
Featured Investor // Steven Kollar
At present, a lot of real estate investors say they are waiting for the “tipping point” in their markets: that point where inflation, rising interest rates, and global economic influences combine to create a fire-sale situation similar to the foreclosure tsunami of the last housing crash.
If you invest in South Bend, Indiana, however, fix-and-flip investor and turnkey rental provider Steven Kollar says you could be waiting a while. “For us, that tipping point is going to be slightly different than what most people think,” Kollar said. “Buyers may not be able to buy as much house because of interest rates, but they are still going to be looking to buy.”
Kollar said his market, the greater South Bend area, tends to remain stable and does not fluctuate wildly even when the national economy is volatile.
“Indiana is boring. We do not see the high appreciations, nor do we see the ‘low lows,’” he explained. “We just have solid cash flow, and that is what we tell investors from the east and west coasts who buy here.”
Of course, South Bend, like much of the rest of the country, has seen some relatively extreme movement since 2020. Home values have risen more than 24% over the past year and by more than 80% over the last five years. Nevertheless, Realtor.com analysts estimated in April 2022 that the median list price for a home in the area was still just under $160,000.
Plenty of Demand in a Traditionally Stable Economy
Thanks to the presence of employers like the University of Notre Dame (and four other major institutions for higher learning), St. Joseph Regional Medical Center, Beacon Medical Group, AM General (which manufactures military and commercial vehicles), and Honeywell International, South Bend is home to many workers seeking to buy homes before interest rates rise farther.
“We are also the RV capital of the world,” Kollar noted. “Those employees, the RV workers, are making six figures because they are working so much. They tend to buy older homes in relatively lower-priced areas, but they buy them with LVP, granite countertops, stainless steel appliances, etc.”
Kollar warned that although the South Bend market is recession resistant, flip buyers are likely to begin experiencing difficulty financing homes. However, he added, rising home prices in the area have made fix-and-flip investing easier on the selling side because lenders who would not finance homes for retail purchase at $70,000, for example, are far more willing when the property appraises at $120,000.
“The recent leap up in value has really benefited the market,” he said.
Kollar had another word of warning: Selling houses is about to get harder as 2022 ends and 2023 begins. “The market is going to shift in the next 18 months. Surround yourself with people who will tell you the truth — not pie-in-the-sky or doom-and-gloom,” he recommended. “Also, prioritize getting the work on a flip done. Otherwise, your holding costs will eat you alive. You have to remember you are about to start having to work to sell that house, not just throw it up on the market and wait for the offers.”
Missouri
The Time to Buy is Coming
Featured Investor // Ken Wiley
The state of Missouri has averaged less than one month of housing supply since the start of this year, and it is just one of five states in this condition.
According to data from the Inspection Support Network, Missouri, Kansas, Washington, Nebraska, and Utah all are taking the concept of a “severe housing shortage” to a new level. In Missouri, fix-and-flip investor Ken Wiley says despite this, the time for real estate investors to buy is probably just about 18 months away. In the meantime, he says, be careful.
“I tell people that right now, they need to just hang in there and wait,” Wiley said.
Wiley, who has been flipping for decades and recently passed on his real estate business to his son “unless the deal is a really good one,” has owned property all over the eastern half of the United States. Currently based in Independence, Missouri, he has been watching the current market and waiting for the recession to hit. “It’s a challenge to keep ahead of the market, especially on the downturn,” he explained. “[During a downturn], I want to sell in 30 days and I don’t buy total wrecks.”
Wiley will invest in any property that meets his criteria and has flipped residential homes, vacation homes, hotel properties, orchards, and waterfront land.
Rules for Flipping that Always Hold True
For Wiley, the key to investing in Missouri or elsewhere in the coming months will be holding tight to tried-and-true investment standards.
“Never buy a house with slanted floors or a bad foundation,” he said. “The only people who will buy a property like that probably cannot get a loan to do so.”
He also emphasized the importance of not overbuying when the market first starts to correct, noting that flippers in particular may be tempted to overprice properties in the coming months. “Buy too much when things are still on the way down and you can lose everything,” he warned.
One issue that is likely to affect Missouri housing in the coming months is that many previously low-income housing units are likely to be “poached” by rising rental rates. Missouri offers a low-income housing tax credit that incentivizes developers to build low-income housing for seniors, veterans, qualifying families, and individuals with disabilities. However, many of these properties will soon meet their 30-year requirements for the incentive and, at that point, owners are likely to raise rates or sell the properties. Not only will this exacerbate the housing shortage’s effects on lower-income earners; it could ultimately soften up the market if owners elect to sell en masse. Fix-and-flip investors should be wary of bulk buying during this period.
For Wiley, even with all his experience, the safest way to invest in fix-and-flip deals is to treat the process like an educated gamble.
“Do not invest anything you cannot afford to lose,” he said. “But if it’s a good deal, get the pen in your hand and sign as quick as you can.” He also emphasized the importance of loyalty to other real estate professionals in any market, but particularly a tough one.
“Do things right and make money, but always deal with the one who brought you the listing,” he said. “Double-cross a realtor and your name is going to be mud.”
Dallas/Fort Worth, Texas
An Institutional Target For 2023
Featured Investor // Jamie Wooley
As Summer 2022 drew to a close, homebuyers in the Dallas/Fort Worth area were beginning to feel some pressure thanks to inflation, rising interest rates, and the relentless competition that has characterized most Texas markets for more than a decade now. According to Redfin, about one in every six home contracts fell through in June 2020, more than have been seen since March 2020, when the COVID-19 pandemic emerged in the United States.
While some might argue that this metric merely indicates a potential return to “normal” in a market that has been tagged as overheated for months, others say the signs are more sinister because most of the deals are on new construction and buyers failed to secure financing before interest rates rose. This means that today, a buyer will likely be able to afford about 20% “less house” than they could when they went under contract.
In the DFW area, that could mean a permanent shift in the market dynamic because those homes are not necessarily going unsold or being sold to other retail owner-occupants; instead, they are likely to be snapped up by institutional buyers.
According to the National Association of Realtors, Tarrant and Dallas counties had the highest percentage of institutional buyers of residential properties in the country in 2021 (52% and 43%, respectively). Texas is also the state with the highest percentage of institutional buyer-purchases in 2021 (28%). At present, most institutional transactions occur between the investment firm and an owner-occupant seller because the institutional buyers offer to buy as-is, cash, or guarantee a purchase price. However, this places them directly in competition with individual investors — particularly fix-and-flip investors — and, at some point, if the new construction prices get attractive enough, the institutions will surely make the leap.
Flipping Full Steam Ahead
At present, flippers like Jamie Wooley, founder and CEO of W Streets LLC, are still going full steam ahead. In 2022, Wooley reported her company is “on track to flip/close on 90 to 100 homes with $4 million in net revenue [calculated as profit per flip minus expenses outside operations].”
She emphasized the importance of smooth systems in order to achieve a scale like this, saying, “My team has worked really hard and I am so proud of how smooth our systems have become.”
Wooley has a history of strategic flexibility, having specialized in wholesaling, fix-and-flipping, and as a turnkey rental provider.
Successful flipping businesses like Wooley’s indicate more than ever that it is imperative investors have a solid source for leads on potential deals that will place an investor in direct contact with potential sellers long before they might encounter an institutional offer. Furthermore, that contact must be compelling from the start, since iBuyers are ubiquitous in most parts of the country at this point and sellers no longer have the instinctive distaste for institutional buyers that used to give the mom-and-pop investor an advantage.
Texas is popular for a reason: The state is wildly investor- and business-friendly. There is not likely to be a decline in demand for residential property in the near future because businesses and employees will keep moving to the Lone Star State for tax advantages and investor-friendly public policy.
Orange County, California
Creativity Is Essential
Featured Investors // Scott Duncan & Shari Napear
In 2021, Orange County hit the “$70 million mark” when a one-acre Laguna Beach estate sold, off-market, for the record-breaking price. Agents in the area high-fived, noting that this pushed the market closer in price and perceived attractiveness to the Los Angeles market.
In a hot market in one of the most expensive states for housing in the entire country, most investors probably would not expect there to be a lot of opportunity for fix-and-flip deals. For Scott Duncan and Sheri Napear of S&S Design, however, the fix-and-flip opportunities are becoming increasingly plentiful.
“These days, deals are made, not found,” said Duncan. “You have to be super-creative because it is not likely that you will just run across very many deals out here.”
Duncan has done more than 100 flips since he started investing and partnered with Napear, an interior designer and investor, about three years ago. In most of their fix-and-flip projects, Duncan and his team strip the home down to the studs, then Napear incorporates interior design and her specialty, Feng Shui, into the flip to create a space that “looks and feels beautiful,” as she describes it.
“People may not even know that this design element is there, but we always try to bring the balance of the environment into the space,” Napear explained.
The investors’ retail buyers find the additional design element extremely appealing. Duncan also brings unique elements to the process; he and his team designed and ultimately permitted several specialized upgrades that work particularly well in older Orange County homes.
“Some of the upgrades, like raising some types of ceilings, were quite an engineering nightmare to get approved by the state of California,” Duncan said. “Now that we have that figured out, though, it is easy for us now.”
The two almost always sell to cash buyers, which also makes the flipping process speedier and more straightforward in a market that is overheated, volatile, and intensely competitive.
“It means the highs and lows of the market do not affect us as intensely,” Duncan added. “We are still going strong and have more in front of us.”
The biggest stumbling block the investors have faced thus far is the difficulty of finding skilled labor in the area. Napear recalled recently turning down a “very desirable” Laguna Beach deal because they simply lacked the resources to do the flip at that time.
“Materials shortages have not been that much of an issue for us – and that is getting better every day,” said Duncan. “If we could get more labor, we would be able to grow much faster because we would not have to put projects on hold.”
Overall, Duncan and Napear feel optimistic about fix-and-flipping in Orange County for the remainder of the year and into 2023 and beyond.
“We have more buyers now than we have projects,” Napear said. “Since they are cash buyers, they are ready to buy as soon as we have the right inventory available.”
Duncan concluded, “This market is great for people who are downsizing, and it is still very near the water. People are happy to move into these smaller homes and have their paddle boards, boats, and golf carts close by. They absolutely love it – and so do we.”
