And how brokers can take advantage…
The following article is written by Mitchell Zagrodnik (pictured above), partnerships director at RCN Capital.
It’s no secret that the real estate market has been unpredictable in recent years. Since the middle of 2022, the higher rate environment mixed with an overall lack of inventory throughout the US has left many prospective buyers and sellers in a state of flux. As brokers, staying ahead of the game by having access to different types of loan programs can give you a massive long-term advantage, and can prepare you for different market cycles so you always have a product that’s in demand. In a struggling residential market, it may be time to look into commercial loans for residential properties. There have been consistent efforts from buyers in the residential investment space, primarily in the fix and flip market. With these being commercial loans, you are not limited to originating in your own backyard, opening an array of opportunities throughout the United States.
As opposed to purchasing a rent-ready rental property, where investors would make passive income over a longer period of time, the main attraction of fix and flips for investors is the fact that they can receive larger returns on their investment more quickly. The reason why this should be attractive to brokers is because investors are repeat customers, always on the lookout for the next deal. This opens brokers up to a new source of business and can even unlock the potential to profit from both sides of the transaction.
A new program to utilize
If brokers plan on taking that step into the residential investment space, it is crucial that they put in the work to become proficient in the field. Like any great salesperson, becoming an expert in a product can bring significant value to investors. When it comes to fix and flips, investors ideally are going to be looking for properties that are in a desirable location, have good physical characteristics, and are relatively affordable to the local market. Establishing and developing relationships are also a key factor in the real estate space, and even though investors can lead to repeat business, it’s up to the broker to ensure the deal process goes smoothly to secure that repeat business.
A perfect example of this is a case where the investor is looking to sell the property upon completion of rehab. What better way to further showcase value than by helping clients find a buyer for the property? The best way for a fix and flip investor to ensure the most profit on their investment is to offload the property as quickly as possible. By putting in the effort to have a buyer lined up, brokers provide a quick transfer from investor to homeowner and even set themselves up to broker that residential loan for the buyer as well. Aside from that, there is another case where a broker can make the most of the situation. It is not uncommon for an investor whose initial plan to flip the property ultimately decides to hold it and refinance into a long-term rental loan. In these scenarios the broker is in position to profit from the initial fix and flip loan, and then once again when the refinance happens.
The current state of the flipping industry
As with the overall housing market, the fix and flip industry has had its challenges over the last decade as well. Like any trend that picks up steam, those who were on the ground floor just before the industry took off capitalized heavily on these opportunities. According to recent data provided by ATTOM, in 2023 there were 308,922 single family homes and condos flipped, making up 8.1% of all home sales. Meanwhile, 2022 was record-setting, with roughly 437,000 houses flipped, making up 8.4% of all home sales. Another noteworthy point is that since 2016, gross profit on flips has been consistently between $60,000 and $70,000. But in that same timeframe, the average return on investment has been consistently dropping as well, from upwards of 51% returns in 2017 to nearly half that in 2023 at an average of 27.5%.
It’s worth noting that a 25-30% return on investment is still a great return. For example, investing in the S&P 500 typically leads to an annual return of around 8% on average. Granted, the reasons for these returns dwindling for investors can be chalked up to several different reasons. Rising median home prices, material costs going up, a higher rate environment leading to less interest from potential buyers are all valid claims to that notion. The carrying costs while holding the property during rehab can also cut into profits, again stressing how important it is to sell the property as quickly as possible. The important thing to remember here is that even in the current market, investors are active and looking, and fix and flips are still happening throughout the country.
Location, location, location
Investors today have ample amounts of tools at their disposal in order to make the most of the opportunities throughout the country. Many investors nowadays are investing in states outside of where they live.
According to ATTOM, the areas with the highest returns on investment currently are the Scranton/Wilkes-Barre/Hazleton area of Pennsylvania with an average return of 112.5%. Followed by Lake Charles, Louisiana at 107.8% ROI, Pittsburgh, Pennsylvania at 105.3% ROI and Akron, Ohio with 99.5% ROI. What is interesting about this data is that of the top 10 best markets for returns, Pennsylvania towns are on the list 4 times, with Harrisburg/Carlisle and York/Hanover joining. With the exception of Lake Charles, every location on that list is located in or around the Northeast. The reason for the higher returns can be attributed to these locations having median home values that are relatively lower. The median home values for these specific areas are going to range anywhere from $150,000-$270,000, meaning that these investors are picking a prime location with affordable homes, renovating, and then listing again for a reasonable price that warrants the returns they are receiving.
The areas with the lowest ROI as of late include Austin, Texas at -4.1% ROI, Provo, Utah at 0.6%, Boise, Idaho at 1.9%, and Ogden, Utah among others. The trend to notice here is that these are cities that have seen vast growth within the past 5 years, and even though these are desirable areas that people are flocking to, the home values in these areas have skyrocketed. Take Austin for example, according to Zillow, the median list price as of June 2024 is $614,967. In 2019, that number was roughly $378,559, so the value has nearly doubled in that time. Access to all this data and information is readily available to those who are willing to do the research. Keeping an eye on these trends as well as which markets are up and coming is a terrific way to be an asset to investors.
Do your research and utilize your network
I cannot emphasize enough how crucial it is to take advantage of the resources you have in the real estate industry. As brokers, acting as the focal point into how business gets done and being a wealth of knowledge in the space can greatly benefit your clients. Diversifying your product offerings and finding a great lending partner is an ideal approach to educating yourself on their products, as well as opening yourself up to all the knowledge and resources they have to offer.
