Profits on house flipping are becoming harder and harder to get. Home prices are high, there are fewer and fewer distressed and/or foreclosed properties available to buy and competition for distressed/foreclosed properties is fierce.
The result of these increasing difficulties within the home flipping segment of the market? Home flipping investors are more cash-strapped than they were in the past and need more financing in order to achieve their goals.
The good news for flipping investors is that mortgage rates are low AND lenders are “eager” to help. According to ATTOM Data Solutions, home flipper financing jumped from $6.4B to $8.4B in Q2 2019, the highest level of home flipper financing since Q3 2006.
Todd Teta, chief product officer for Attom, said, “We have been seeing a steady incline in total financed purchase dollar volume (for flipped homes) every quarter since about 2015 and now we are reaching pre-recession dollar volume highs with profit margins dropping on home flips. An increase in financing could up the risk for investors who have to face interest payments into their deals.”
Q2 2019 saw approximately 41% of flipped properties were purchased with lender financing as compared with 68% purchased flipped properties during the housing boom of 2005. The reason for this discrepancy? Mortgage underwriting regulations are much stricter now than they were in 2005. And, of course, some flipping investors use rental income or money from their “last” flipped house to purchase the next flip.
Fannie Mae, Freddie Mac and the Federal Housing Authority all back loans to investors who buy home flips but these agencies limit the number of home flips each borrower can have.
According to Guy Cecala, CEO of Inside Mortgage Finance, “…if you are planning on flipping (and your W-2 does not reflect consistent, month-to-month, regular income), you probably need to document that you can support payments on all your investor mortgages in addition to other debt that may come up. These loans are not your “No Doc,” no-down-payment investor loans that were available before the housing crisis.”
In addition to larger lenders and community banks, specialized finance companies that offer home-flipping-type mortgages to investors are becoming increasing popular, just as they were during the boom of 2005.
Thanks to ATTOM Data Solutions for source data.
Also read: https://timandjulieharris.com/2019/10/16/new-american-dream-home-renter-ship.html, https://timandjulieharris.com/2019/10/16/according-to-millionaires-real-estate-reigns-as-best-investment-one-can-make.html, https://timandjulieharris.com/2019/10/05/virtual-staging-for-virtually-every-room.html