HOUSE FLIPPERS AWASH IN CASH AFTER RECORD YEAR
Average $66K profit per U.S. home as lenders open up to fix-and-flips
There are few easier ways to make a quick buck in America today than f lipping houses. The real estate market is red hot, profits on flips are at a record high — some $66,000 on average per home — and throngs of HGTV-inspired wannabes have been piling into the business for months.
And now, America’s financiers are too. There are more than 60 banks and other firms financing flippers today, according to AlphaFlow, an investment firm that buys real estate loans from lenders. That’s an increase of almost 50 percent in a little more than two months.
It was always just a matter of time before lenders set aside their apprehensions and began writing checks to the fix-and-flip crowd again. Memories of the 2007 bust are slowly fading and, more importantly, interest rates on most fixed-income investments are still so paltry in the pandemic that lenders are desperate to get their hands on anything that provides juicy returns, especially when it’s tied to a business that’s booming.
The 7.9 percent average annual rate on a fix-and-flip loan is more than twice the 3.09 percent
rate that a bank can earn on a 30year mortgage, and more than double the 3.75 percent that loans to some of the biggest junk-rated borrowers might pay. Loans to flippers also tend to be shortterm, often measured in months rather than years, which is appealing to many lenders when interest rates are rising.
To be clear, it’s not the big Wall Street names that are piling into the business, at least not yet. For now, it’s mostly second-tier regional banks and shadow lenders with names that most Americans never heard of, like Cutter Hill Capital, Builders Capital and Temple View Capital.
Still, they’re collectively plowing so much cash into the market that it’s taken some house-flip
ping veterans by surprise. John Piazza, a contractor who specializes in rehabbing homes around Wilmington, Del., said that never in his four decades in the business had he seen as many cash-flush competitors as he does today.
“Banks are just throwing money at you,” Piazza said.
Flippers are profiting from city dwellers who are fleeing urban pandemic life and looking to buy homes in the suburbs. There just aren’t that many to purchase — the inventory of existing homes for sale is at its lowest since at least 1999.
That low stock is encouraging investors to buy up older or derelict properties and fix them up, effectively adding to the supply of homes available for sale. Around 5.9 percent of home sales in 2020 were to these kinds of buyers, the second-highest percentage for any year since 2012, according to research firm Attom Data Solutions.
With the real estate market hot, flippers have generated high profits. The average gross earnings for such a home sale reached a record $66,300 in 2020, the highest in data going back to at least 2005, according to Attom. But flippers are finding they have to pay more for the homes they buy, which is cutting into their return on investment, averaging 40.5 percent in 2020 compared with 41.5 percent in 2019.
The high dollar figures are making flippers more interesting to lenders, pulling in parties and cutting into potential returns for financiers. Current lending rates have fallen 2 percentage points from this time last year, according to John Beacham, a former commercial real estate executive at Deutsche Bank who now heads Toorak Capital Partners, an investment company specializing in this type of lending.
Many investors expect flipping to continue its upsurge this year. There are still families looking to move into bigger suburban houses. AlphaFlow estimates that flippers could sell $75 billion worth of homes over each of the next two years, compared with an average of around $56 billion over each of the last three.