The Future of Fix and Flips

Learn more about what past data and current market trends reveal about the future of fix and flip investments.

Recently ATTOM, the leading provider for nationwide property data, released their year-end 2022 report on homes flipped in the United States. The report uncovers a sharp increase in homes flipped, however, it also finds that gross profit margins on home flips in 2022 dropped to the lowest level since 2008.

Home flipping has certainly gained popularity among real estate investors over the last decade, but is it still a wise investment? We will review the data and look at current market trends to help you determine whether or not a fix and flip is right for you this year.

ATTOM’S 2022 Data

The report reveals that there was a 14% increase in single family homes and condos flipped in 2022 than in 2021, and 58% more than in 2020. Fix and flip investors contributed to 8.4% of all homes sold last year, the highest percentage since 2005.

Overall 407,417 single family homes and condos were flipped nationwide in 2022. However, we cannot consider that figure alone. The typical gross profit of homes flipped in 2022 was $67,900, which is a decrease of 3% from the average gross profit in 2021. The latest calculation on gross return on investment (ROI) for fix and flips was down 32.6% compared to 2021.

Returns on fix and flips have dropped significantly nationwide bringing them to the lowest point in over 15 years. The median resale price for a flipped home rose 12.3%, which unfortunately, was less than the 17.3% increase investors experienced when they purchased the homes, creating a reduction in margins.

According to ATTOM, in Q3 of 2022, fix and flip investors made approximately $62,000 in gross profits. Simultaneously, the average resale price of homes dropped 5.5% to $310,000. When compared with the average initial cost to purchase a fixer upper, which was $248,000, you’re looking at an ROI of 25%, a major drop from the 31.8% produced the previous year.

Market Trends for Fix and Flips

Home flipping started off strong in the first quarter of 2022, but was halted in the middle of the year by a sudden increase in mortgage rates and consumer price inflation. These factors, among other variables, have made it difficult to purchase a home, therefore decreasing the demand.

There was an influx of investors purchasing homes in 2021 that continued into 2022 with the obvious hope that demand would grow, or at a minimum remain strong. By the fourth quarter of 2022 many investors struggled to find buyers for their flips as home prices began to cool off.

According to ATTOM, 63.7% of fix and flip investment properties were purchased in cash, making high interest rates less impactful for those that were able to come up with the capital. However, high interest rates do impact those in the market to purchase a home. Fortunately, mortgage rates have softened, but have they softened enough? Experts anticipate that the current mortgage rates combined with high home prices will keep potential buyers from purchasing a home.

The 70% Rule

If flipping is something you decide to take on, consider using the 70% rule to assist you when budgeting for your project.

The most successful strategy for home flipping is to buy low and sell high. The 70% rule is a general guideline that can help flippers avoid overspending on the front end of a project. The rule is that an investor should never pay more than 70% of a property’s after repair value (ARV) minus the cost needed to renovate the home.

Investors must estimate how much the property will likely sell for after renovations have been made. Then they can multiply that number by 70% and subtract it from the estimated rehab cost to find the maximum price they should consider when buying a fix and flip. Once this calculation has been made, investors can use this number as a guide when sourcing properties.

The 70% rule is a simple calculation that can help you avoid putting your profits at risk.

After-repair value (ARV) ✕ .70 − Estimated repair costs = Maximum buying price

While past data and current market trends point to an unfavorable year for fix and flips, all real estate investments are accompanied by some level of risk. The market is ever changing making it difficult to make accurate predictions. However, by doing extensive research, looking at the data, and working with seasoned real estate professionals you can increase your chances of success.

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A division of CALCAP Advisors, CALCAP Lending benefits from the expertise of a seasoned team of professionals with extensive, successful track-records covering a variety of disciplines and leading large, nationally-recognized institutions. A private money direct lender, CALCAP Lending provides short to mid-term financing for property investors and businesses looking to purchase, refinance, renovate, and construct residential or commercial properties.

Lending FAQs

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What is private money lending?

Private money lending is a collateral-based lending strategy that is often associated with shorter terms and more attractive features. A private money loan offers more flexibility than a conventional mortgage or bank loan.

How does a private money loan work?

Private money lenders provide financing using money from private entities. Private money loans often work as bridges to help investors gather funds to achieve their short term real estate goals, but long term, permanent options may also provide.

Why would I choose a private money lender?

There are many advantages to using a private money lender for your real estate investments! Private money lenders can be more lenient when it comes to borrower credit issues, often there are no prepayment penalties, you can leverage your cash to buy multiple properties, and private money loans are quicker when compared with institutional loans.

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