The flippers at home are finally feeling the pain

  • Experts said in the spring that home flippers could face problems if the market turned quickly.
  • That’s exactly what happened when interest rates jumped and flippers are feeling the pain.
  • Some are cutting prices or renting homes as they face high borrowing costs and weaker demand.

John Ziomek has made good money flipping houses in the Houston area over the course of a decade. But these days, he’s content to stay on the sidelines.

He sold his last project in early July when homebuyer demand was slipping in response to rising mortgage rates. He had to drop his asking price by about $50,000 and made no money on the nearly $200,000 sale, he told Insider.

Ziomek said he’s relieved to be out of business, at least temporarily.

“I’m glad I got rid of what I had when I did,” he said.

Home flippers can no longer rely on unexpected home price appreciation to protect them from losses that may arise from unexpected costs or project delays. Home prices have held mostly steady in their favor, but higher lending rates have weakened demand for their listings, making it harder to turn a profit in a business already known for tight margins. These discouraging conditions are causing more flippers to drop prices on their listings or keep them as rental properties.

Others, like Ziomek, are exiting the business altogether as they await market uncertainty.

House flipping grew in popularity earlier during the pandemic, when soaring home prices virtually guaranteed a profit if you held on to a house for a few months. But the writing was on the wall in the spring when experts he told Insider that flippers were among the investors most exposed to pain if the red-hot housing market suddenly cooled.

“The first group that automatically comes to mind is the repair and flip industry,” Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting, told Insider in April. “This industry tends to have houses for less than a year, so if you do any pricing correction and they buy in any peak period and then try to sell quickly afterwards, they can lose money on that transaction.”

That’s exactly what happened in the months since, thanks to aggressive rate hikes by the Federal Reserve. The average interest rate on a 30-year mortgage is now close to 7%, more than double the rate just a year ago; according to Freddie Mac. The resulting drop in demand has upended business plans that relied on high sales prices to justify the sums allocated to the purchase and repair of the home.

John Burns’ quarterly surveys of hundreds of flippers around the country show how quickly sentiment has changed in the industry.

In January, the survey found that it was “a good time to be a flipperIn August, the results from the quarterly survey opened with the line, “The fix-and-flip market is breaking,” noting the extent to which the behavior of flippers at home had deteriorated. Respondents to the August survey still largely reported gains, but they were much more pessimistic about the next six months.

The softness in the for-sale market could prompt more flippers to become owners, a move that some regular homeowners consider also. Christena Reinhard, a sales executive in California who flips houses on the side with her boyfriend, listed two of her projects for sale this summer. One home sat on the market for nearly two months before selling in late September for $61,000 below its original asking price. The other home, listed for sale at the end of July, remains on the market even though Reinhard has already dropped nearly $20,000 off the asking price.

Reinhardt, who he told Insider In August, when she and her boyfriend had vowed not to buy any more projects until early next year, she said she planned to keep the unsold house on the market until mid-October. If it doesn’t sell after another price cut, he’ll keep it as a rental, he said.

“Three people wanted to write proposals, but they couldn’t find funding,” Reinhardt said. “They just can’t qualify for the payments.”

Compared to the sales market, the rental market remains strong, although some say it could as well suffered a weakening of demand if the US enters a recession and rents become more unaffordable. But today, the prospect of owning and renting a home can seem more appealing than selling at a discount.

Nicholas Corso and Alex Macias, business partners who flip houses and own investment properties in the Chicago area, said they typically flipped one or two houses a year and acquired a few more to keep as rentals. Recently, they have turned their attention to rentals.

“We’re more selective,” Corso said. “We don’t have to bid against the next person who tries to get that property.”

Corso and Macias are clients of New Western, a marketplace that connects home flippers with thousands of potential U.S. real estate investments. Kurt Carlton, its CEO, said there were still deals that worked for savvy investors, but they wouldn’t get the same attention from a more speculative buyer in it for a quick buck.

“You don’t have as many people who maybe watch the TV shows and think about quitting their jobs to become flippers. We don’t see as much of that,” Carlton said. “But you see a lot of experienced guys who are still picky.”

Other buyers are betting they can buy a rental property now, make the cash flow work for a few years, then sell when interest rates are lower and there’s more demand, Carlton said.

“These people are almost 100% confident that interest rates will come down in the medium term and that house prices will be fairly stable and continue to appreciate, just not to the levels they were before,” Carlton said.

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