Surprise! COVID-19 Is Fueling the Fix-and-Flip Industry

By Charles Sells

When the country went into a near-universal lockdown in March of this year, most real estate investors assumed it would mean a temporary halt for their operations.

This naturally made everyone in the industry nervous. Rental owners worried their tenants would be out of work and unable to pay their monthly rents.

This turned out to be a legitimate concern, although many tenants opted to use government funds to make those housing payments, and the fallout has not been, so far, as dire as many feared and expected. Retail property owners, on the other hand, saw many of their worst fears realized as their corporate tenants filed for bankruptcy after bankruptcy as the spring progressed.

And flippers? Well, flippers soon found out it was going to be a hot spring and a hotter summer because the coronavirus pandemic has been strangely great for certain submarkets in the fix-and-flip industry.

Private Lenders Find Themselves in More Demand than Ever

Real estate investors have always worked with private lenders to create positive partnerships and strong returns on projects on which conventional lenders will not lend. The COVID-19 pandemic has considerably lengthened the list of things conventional lenders will not or cannot touch, and that has been a great boon for private lenders who may not currently be able to work their usual “day jobs.” As mortgage delinquencies rise in many states, traditional lenders are likely to become even more stringent about their lending requirements. This will put private lenders in an enviable position of being able to charge higher interest rates than they have in recent years and allow them to “cherry pick” the most attractive deals for their portfolios.

Since established fix-and-flip investors have existing relationships with private lenders, this creates an advantage for investors experienced in the space. That established relationship will be particularly important since COVID-19 and the associated regulations governing social distancing, travel, and physical meetings will likely make private lenders reliant on a flipper’s accurate assessment of a property more than they have had to be in the past. With fewer inspectors willing to conduct in-person inspections and virtual showings becoming the norm, private lenders will likely prefer to rely on proven and experienced investors as the fix-and-flip market heats up.

Suburban and Rural Living Could be Making a Comeback

One of the biggest short-term effects of the coronavirus shutdown has been a shift in buyer demand. Prior to spring of this year, buyers and renters placed high value on proximity to urban centers. Walkability was prized, and community living spaces were considered acceptable alternatives to higher volumes of square footage.

Now, however, with most Americans working remotely and an increasing number of companies announcing they will allow remote work indefinitely (or even sell off their office space entirely), the allure of spacious suburban and even rural living along with the lower cost-of-living outside the city center is attracting both renters and homebuyers.

While most analysts are skeptical that cities will actually “empty out,” as some alarmists are predicting, there is definitely a rising demand for homes with more space (to allow for work, play, and social distancing) and big yards for as much outdoor living as possible. With many infectious disease experts beginning to agree that outdoors is much safer than indoors when it comes to COVID-19 spread, the value of a great patio or a well-designed deck and firepit cannot be overstated.

“The risk is definitely lower outdoors,” said Kimberly Prather, an atmospheric chemist at the Scripps Institution of Oceanography, in a recent article with Elemental. She cited the primary reason for this as “there is just more fresh air,” although there are additional factors that may limit spread in outdoor spaces.

Families who have not been able to socialize with older relatives or grown children living outside the home due to concerns about spreading the virus are increasingly wanting to have options at their homes for doing so. Outdoor living space is coming at a premium as a result.

This is the ideal situation for fix-and-flip investors because adding or upgrading outdoor living space is usually a straightforward, high-return process that adds value quickly. For example, according to Remodeling magazine, installing a 16-by-20 pressure-treated wooden deck adds nearly $9,000 to a home’s value upon completion.

Flippers operating in areas of the country where outdoor living space has previously been less prioritized or where the climate permits for year-round or nearly year-round outdoor living and, as a result, where extensive renovations could bring the buyers running, will certainly benefit from this new buyer desire to have more space, more land, and lower housing costs. Clearly, the suburbs are calling.

Flipping is Already Resurging, but Not Every Market Will Make It

At the start of 2020, many flippers were already experiencing diminishing returns simply because there was so much competition in most markets. If an investor did not have a source of off-market leads for their flips, they simply would not be able to buy with enough cushion to generate predictable, solid returns. According to ATTOM Data’s 2020 U.S. Home Flipping Report, profit margins had decreased in more than half of the metro areas the report analyzed in Q1 2020 compared to Q1 2019.

Mid-2020, however, is starting to look markedly different. According to a market scenario set out by analysts at Realtor.com, although home prices have not fallen yet, certain homeowners will soon find themselves motivated to sell in order to avoid previously postponed foreclosures. However, warned NuWire analysts in mid-July, the new trend may look more like fix-and-flip-and-hold because investors may need to “flip-to-keep” to really benefit from a V-shaped rebound in the market.

If fix-and-flip investors are compelled to hold their properties for longer periods of time than have traditionally been standard, the resulting quality of renovations is likely to rise along with the eventual sales price. Realtor.com analysts also suggested that the flip-to-keep trend might be accompanied by a decline in flipping activity in the short-term as investors wait to cash in on the improvements they make on their homes.

No matter how the economic recovery ultimately is shaped, it seems likely savvy flippers will be focused on acquiring good deals now, renovating them with the idea that they might need to hold them for a bit longer than would usually be necessary, and then selling fast (and high) when the time is right.

How to Spot a Hot Flipping Market in Summer 2020

For new fix-and-flip investors, breaking into a fix-and-flip market today could be difficult if they do not have connections with established operators in the industry. In February 2020, Hubzu released a report on the top markets for fix-and-flip properties that indicated flipping was “dominating” east coast markets. That trend has continued through COVID-19, in large part because the southeast, in particular, has adopted a set of investor-friendly regulations that have not caused new construction or renovations to halt even during lockdown conditions.

Look for markets with affordable housing, pleasant climates that will permit outdoor living, and that offer housing with access to metropolitan centers via interstates or highways in the event that a remote worker has to commute into the office a few times a month. With a combination like that, you will find flipping is still heating up even at infection rates rise.

Learn more about coronavirus-resistant investing and where we are buying properties in today’s economic downturn by visiting PIPGroup.com.

About the Author

Charles Sells is the founder and CEO of The PIP Group, a turnkey service provider that focuses on investments in distressed real estate assets including tax liens, tax deeds, traditional foreclosures, fix-and-flips and long-term cash flow acquisitions. He has been involved in tax lien investing for over 20 years, during which time The PIP Group has grown to become one of the largest agencies of its kind with nearly 1,000 individual and institutional investors worldwide.

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