And if unemployment remains high and forbearance programs for mortgages end, lenders could end up foreclosing on a growing number of homes. Speculators, who moved aggressively to buy homes in the aftermath of the last property meltdown, could once again be ready buyers of repossessed homes that banks may be eager to shed.
The industry has changed since the housing bubble, according to people who renovate homes or finance flippers. For one thing, the supply of homes is much tighter after years of relatively low building, making it less likely that prices will plunge, said Ray Sturm, co-founder and chief executive officer of AlphaFlow.
When existing home sales fell to a near-decade low of just over 4 million units annualized last May, they soon came roaring back to end the year at 6.65 million, according to the National Association of Realtors. That was probably because looking for homes amid a pandemic was difficult, Toorak’s Beacham said.
“There is pent-up housing demand; we expect 2021 to be a strong year for this market,” Beacham said, referring to flippers.
The most popular states for home flipping are Tennessee, Arizona, Alabama, Georgia and Nevada, according to data from Attom.
Hot Markets
Toorak isn’t alone in seeing better times ahead. Civic Financial Services LLC makes loans to investors who purchase and rehabilitate multi-family buildings and single-family rentals, and this year it plans to increase lending by more than 50% to $1.7 billion, William Tessar, the Redondo Beach, California-based lender’s president, said.
His optimism comes partly due to the company’s newfound ability to source cheaper funding, as it was recently acquired by Pacific Western Bank.
Before the deal, Civic’s cost of funds were around 5%, Tessar said, but now that it’s part of a bank it can rely on cheap deposits to fund new loans. The average U.S. bank paid 0.24% in interest for its funds last quarter, a record low, according to the Federal Deposit Insurance Corp. That gives Civic the opportunity to significantly increase its margins, Tessar said.
Wilmington, Delaware has been eager to bring in builders and contractors that rehab houses to help encourage neighborhood renewal, according to John Rago, deputy chief of staff in the city mayor’s office.
City officials transferred ownership of vacant properties to a land bank that works with developers to fix and sell the houses, Rago said. In the last two years, the land bank has sold more than 100 properties.
Not everyone is hopeful about the future for flipping, though. With housing inventory so low, there aren’t necessarily a lot of opportunities for finding underpriced homes to fix up, said Curt Altig, CEO of Seattle-based lender Builders Capital. More flippers are chasing fewer transactions now, he said.
Low End
Flippers often focus on the lower end of the housing market. Almost 68% of all home flippings last year sold for $300,000 or less, according to data from Attom. The median price of an existing home sale at the end of December was $309,200.
These homes also tend to be on the smaller side, averaging around 1,450 square feet over the last five years. The median size of a single-family home in the U.S. is around 2,300 square feet.
Almost 60% of firms rehabbing homes fund themselves, according to Attom. Parties that get financing can usually only get loans equal to between 60% to about 75% of the assessed home value, leaving more cushion to protect the lender.
“The reality is people want to move into a house that is move-in ready,” Toorak’s Beacham said. “Most people are not handy with fixing things up.”
—With assistance from Steven Church.
This article was provided by Bloomberg News.