More House Flippers use Leverage as All-cash Purchases Decline

Contributing Writer, B2R Finance | Real Estate Investment

By Kerry Curry, B2R Contributing Writer

It seems logical that a decline in the distressed housing stock coupled with low inventories would lead to fewer residential property flips, but just the opposite is true in today’s market where house flipping reached a 6-year-high in the second quarter.

Part of the reason for the rise: Flippers have more financing options than they’ve had in the past although hard-money loans likely still account for the bulk of flips that use leverage.

ATTOM Data Solutions, the new parent company of RealtyTrac, recently released its Q2 2016 U.S. Home Flipping Report, which shows 51,434 U.S. single-family and condo sales were completed flips in the second quarter of 2016. This is up 14 percent from the previous quarter and up 3 percent from a year ago, making this the highest number of home flips since Q2 2010.

ATTOM describes a home flip as a property that is sold in an arms-length sale for the second time within a 12-month period.

Mortgage Companies Offering Leverage on Flips

The share of flippers buying with cash dropped to the lowest level since Q3 2008, according to the report, which notes that 68.3 percent were purchased with cash, down from 71.1 percent in the previous quarter and down from 69.6 percent in Q2 2015.

“New players in the marketplace are providing some creative spins on the traditional hard money loans such as bridge loans and refinances, while also providing competition that brings the interest rates down significantly,” Daren Blomquist, senior vice president at ATTOM Data Solutions, told B2R Finance.

“Ten years ago the typical hard money loan would be 12 percent to 15 percent interest, Blomquist said. “Now investors can probably easily find a short-term rehab loan with single-digit interest rates.”

Is the Housing Market Headed for Overdrive?

Homes flipped in Q2 2016 accounted for 5.5 percent of all single-family and condo sales during the quarter. Housing experts look at flipping as one method to gauge the health of the housing market.

“Home flipping in moderation (around 5 percent of sales) and done with discipline on the part of the investors (purchase discounts of at least 20 percent below full market value) indicates a healthy and growing housing market,” Blomquist tells B2R. “A disproportionate amount of flips (probably over 10 percent of sales) done without discipline (purchase discounts below 20 percent) indicates an overheated and over-speculative housing market that is headed for engine failure.”

Nationwide, the purchase discount stands at 25.7 percent, meaning that, on average, flippers bought the homes for 25.7 percent below the estimated full market “after repair” value of those homes.

But in some markets, the purchase discount was well below that 20 percent threshold, Blomquist notes, most notably super-hot markets such as San Antonio, Austin and Dallas where the purchase discount is in the single digits. In San Jose, California and Denver — also hot housing markets — the purchase discounts on flips were only 11.3 percent and 12 percent, respectively.

Flippers are also having a harder time flipping their properties quickly once they are renovated. It now takes an average of 185 days to flip, up five days from the first quarter.

The $62,000 average gross flipping profit represented an average 48.8 percent return on the original purchase price, down from a 49.3 percent average gross flipping ROI in the previous quarter, but up from a 47.5 percent average gross flipping ROI in Q2 2015.

Click here to see the full report.

Portrait of a Home Flip

Portrait of a Home Flip via ATTOM Data Solutions

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