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House flipping is suddenly a hot market for America’s lenders

Christopher Maloney, Adam Tempkin and Shahien Nasiripour, Bloomberg News on

Published in Home and Consumer News

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% 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% in 2020 compared with 41.5% 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 leave cities and 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.

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.

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.

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