There are few easier ways to make money quickly in America these days than flipping houses. The real estate market is scorching hot, profits at Flips are at a record high – averaging $ 66,000 per home – and for months now, HGTV-inspired would-be fans have been thronging the business for months.
And now America’s financiers are too. There are now more than 60 banks and other firms funding pinball machines today, according to AlphaFlow, an investment firm that buys real estate loans from lenders. That's an increase of almost 50% in just over two months.
It was only a matter of time before lenders put their fears aside and returned checks to the fix-and-flip crowd. Memories of the 2007 bankruptcy are slowly fading and, more importantly, interest rates on most fixed income investments are still so skimpy during the pandemic that lenders are desperate for something that offers hefty returns, especially if it's on one Company bound is booming.
The average annual interest rate of 7.9% on a fix-and-flip loan is more than double the 3.09% interest rate a bank can earn on a 30-year mortgage and more than double like the 3.75% interest rate on loans to some of the biggest junk companies. Rated borrowers could pay. Loans to pinball machines are also typically short-term and are often measured in months rather than years. This is attractive to many lenders when interest rates go up.
To be clear, it's not the big Wall Street names that are piling up in the business, at least not yet. Right now it's mostly secondary regional banks and shadow lenders with names most Americans have never heard of, such as Cutter Hill Capital, Builders Capital, and Temple View Capital.
A contractor installs a smoke alarm in a townhouse under construction in the PulteGroup Inc. metro housing estate in Milpitas, California, United States on Thursday, October 25, 2018. Ryan Marshall, PulteGroup's chief executive officer, said housing restoration continues because the economy is strong and the stock of available homes remains scarce.
David Paul Morris / Bloomberg
Even so, together they plow so much money into the market that some veterans who turn the house over are surprised. John Piazza, a contractor who specializes in home remediation in Wilmington, Delaware, said that in his four decades in the business, he has never seen as many cash flush competitors as he does today.
"Banks are just throwing money at you," said Piazza.
None of this is cause for panic about another impending real estate bankruptcy. Experts say that we are far from this possibility at this point. Still, they fear that this influx of fresh cash will only add foam to a go-go market – much like the way rock bottom interest rates have boosted financial assets – and will continue to drive up prices for homes that are already out of reach of many fighting Americans.
"The problem is the element of speculation when prices go up because people are expecting it," said Benjamin Keys, associate professor of real estate at the University of Pennsylvania's Wharton School. "Some of it becomes a self-fulfilling prophecy when a lot of money is invested."
Flippers benefit from city dwellers fleeing living in an urban pandemic and looking for homes in the suburbs. There are simply not that many to buy – the inventory of existing properties for sale is at its lowest level since at least 1999.
These low stocks encourage investors to buy up and repair older or derelict properties, which effectively increases the supply of homes for sale. These types of buyers accounted for around 5.9% of home sales in 2020, according to research firm Attom Data Solutions. This is the second highest percentage since 2012 since the beginning of the year.
Since the real estate market is hot, pinball machines have made huge profits. The average gross profit on such a home sale hit a record $ 66,300 in 2020. According to Attom, the highest data value was at least 2005. However, pinball machines find that they have to pay more for the homes they buy, which detracts from their return on investment, averaging 40.5% in 2020 compared to 41.5% in 2019 .
The high dollar figures make pinball more appealing to lenders, attract parties, and reduce potential returns for financiers. According to John Beacham, a former commercial real estate manager at Deutsche Bank who now runs Toorak Capital Partners, an investment firm specializing in this type of lending, current lending rates are down 2 percentage points from that time last year.
Many investors expect flipping to continue its upswing this year. There are still families who are leaving cities and looking to move into larger suburban homes. AlphaFlow estimates that pinball machines could sell $ 75 billion worth of homes in the next two years, compared to an average of $ 56 billion over the past three years.
And if unemployment stays high and mortgage leniency programs end, lenders could foreclose a growing number of homes. Speculators who moved aggressively to buy houses after the recent real estate collapse may again be ready to buy repossessed houses that banks may be happy to ditch.
The industry has changed since the housing bubble, according to people renovating homes or financing fins. For one, after years of relatively low construction costs, the supply of homes is much narrower, making it less likely that prices will fall, said Ray Sturm, AlphaFlow co-founder and managing director.
When inventory home sales fell to a nearly ten-year low of just over 4 million units on a yearly basis last May, they soon returned, ending the year at 6.65 million, according to the National Association of Realtors. That was likely because finding homes was difficult amid a pandemic, Tooraks Beacham said.
“There is a pent-up demand for living space. We expect 2021 to be a strong year for this market, ”Beacham said, referring to Fins.
According to Attom, Tennessee, Arizona, Alabama, Georgia, and Nevada are the most popular states for home flipping.
Toorak isn't the only one with better times ahead. Civic Financial Services LLC makes loans to investors who buy and renovate apartment buildings and single-family homes. This year, lending is expected to increase more than 50% to $ 1.7 billion. William Tessar, lender in Redondo Beach, Calif. President, said.
His optimism stems in part from the company's newfound ability to raise cheaper funding, such as was recently acquired by Pacific Western Bank.
Before the deal, Civic's funding cost was around 5%, according to Tessar, 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% interest on its funds last quarter, a record low, according to Federal Deposit Insurance Corp. This gives Civic an opportunity to significantly increase their margins, Tessar said.
According to John Rago, assistant chief of staff in the city's mayor's office, Wilmington, Delaware has been keen to bring in home builders and contractors who are renovating to encourage neighborhood renewal.
City officials transferred ownership of vacant properties to a land bank that works with developers to repair and sell the homes, Rago said. In the past two years, the Landbank has sold more than 100 properties.
However, not everyone hopes for the future of flipping. With housing so low, there aren't necessarily many ways to find undervalued homes to fix, said Curt Altig, CEO of Seattle-based lender Builders Capital. More pinball machines are now tracking fewer transactions, he said.
Pinball machines often focus on the lower end of the real estate market. Nearly 68% of all home flippings in the past year were sold for $ 300,000 or less, according to Attom. The average price for an existing home sale in late December was $ 309,200.
These homes are also typically on the small side, averaging around 1,450 square feet over the past five years. The median size of a single family home in the United States is around 2,300 square feet.
Nearly 60% of home renovation companies are self-financing, according to Attom. Parties that receive financing can typically only get loans of 60% to about 75% of the estimated home value, adding more cushion to protect the lender remain.
"The reality is that people want to move into a house that is ready to move into," Tooraks Beacham said. "Most people are unable to fix things."