After piling in when the market was hot, investors are facing losses from homes that take too long to sell.
Sean Pan wanted to be rich, and his day job as an aeronautical engineer wasn’t cutting it. So at 27 he started a side gig flipping houses in the booming San Francisco Bay Area. He was hooked after making $300,000 on his first deal. That was two years ago. Now home sales are plunging. One property in Sunnyvale, near Apple Inc.’s headquarters, left Pan and his partners with a $400,000 loss. “I ate it so hard,” he says.
A new crop of flippers, inspired by HGTV reality shows, real estate meetup groups, and get-rich gurus, piled into the market in recent years as rapid price gains helped the last property crash fade from memory. Many newbie investors are encountering their first slowdown and facing losses from houses that take too long to sell. Meanwhile, they face steep payments on a kind of high-interest debt—known as “hard-money” loans—that helped power the boom.
“Flipping only works in an appreciating market where homes move quickly,” says Glen Weinberg, the Denver-based chief operating officer of Fairview Commercial Lending, which is tightening its standards for real estate investors. “Those factors are now in flux, and that’s what’s going to lead to the demise of a lot of flippers.”
About 6.5 percent of U.S. sales in the fourth quarter were flips, or homes sold within a year from when they last changed hands. That was the highest share in seasonally adjusted data going back to 2002, according to real estate data firm CoreLogic. (It’s even higher than during the last boom, when there were more newly built houses for buyers to choose from.) Such deals were particularly attractive in Western markets such as Northern California and Seattle, where prices climbed by double-digit percentages annually. But some areas got too hot, and prices are flattening or falling. Fourth-quarter losses for flippers who sold within a year were the highest since 2009, according to a CoreLogic analysis that looks at buying and holding costs, but not rehab expenses. In the San Jose area, 45 percent of flips lost money
Unlike the last decade’s housing crash, in which speculators bought simply to resell, many of today’s flippers sink money into fixing up properties. Their hard-money loans, which come from private investment groups, often have high interest rates and low down payments. The loans also are bigger because renovation costs are folded in.
Large companies including Blackstone Group LP and Goldman Sachs Group Inc. have gotten into such lending. Competition has helped drive interest rates on some of the loans below 10 percent, says Todd Teta, chief product officer at Attom Data Solutions, a real estate tracker. Now lenders “are easing capital requirements and lengthening loan terms because it’s taking longer to flip homes,” Teta says.
Many flippers are professionals who’ve been in the business for years. But the latest boom has also lured people such as Rachelle Boyer in Seattle, who got into property investing after attending a $25,000 real estate coaching program. The course taught her to think big, stay positive, and never quit. In 2016 she left a six-figure job and started flipping houses. When demand slumped last year, she fell behind on hard-money loan payments for two houses languishing on the market. She has one more to get rid of. “We will get through the dip. Things are already perking up a bit,” Boyer says. Nevertheless, she’s reconsidering the wisdom of reselling rehabs. Her goal now is to buy 25 houses in Pittsburgh, a cheaper, less volatile market, with a strategy of holding on to the properties as rentals.
Weinberg, the Denver hard-money lender, says he’s increasingly selective with borrowers and deals. He requires flippers to put 40 percent down on a house. But the lenders he competes with are financing purchase and rehab costs with only a small down payment or none at all. The flipper “can go in with no money, his pockets just blowing in the breeze,” he says. “The lenders are going to be left holding the bag.”