CORE’s Elizabeth Kee, who frequently works with investors, said five or 10 years ago, home flipping was exclusively the domain of professionals, or at least investors with flipping experience.
“Now,” she said, individual investors “aren’t doing this full time, but they want to throw their hat in the ring.”
One of Kee’s clients — a contractor whose business partner works in financial technology — has flipped a half dozen New York City properties in the past few years. Those properties include a co-op in Queens (he paid $250,000 and sold for $489,000), an Upper East Side studio (paid $425,000; sold for $725,000) and a Tribeca condo (paid $1.5 million; sold for $2.4 million).
The contractor is currently looking to sell an East Village mixed-use building that he bought for $1.4 million. He gutted the ground-floor retail and raised the rent on both the retail and residential unit; it’s now listed for $2.2 million.
Pradhan focuses on entry-level properties in the $300,000 to $500,000 range to minimize his risk.
Compared to being an agent, he said, “I prefer doing this. You’re in control of the transaction from start to finish.”
For the most part, he holds properties for just a few months, including the four to six weeks it takes to renovate. Even in his least successful deal — where he had to hold the property for a year — he broke even. “Knock on wood, I haven’t taken any losses,” Pradhan said.
Five years ago, fix-and-flip loans were the domain of local and regional hard-money lenders.
Although the marketplace is still highly fragmented, that’s changed as institutional lenders, hedge funds and other investors have seen the upside of home flipping, said Bill Green, CEO of LendingOne, a four-year-old company in Boca Raton, Fla.
“The fix-and-flip business is institutional,” he said. “It’s an underwrite on real estate; but there is a consumer-credit component.”
While the post-financial-crisis distress has subsided, the opportunity for home flipping is still massive because the U.S. housing stock is aging rapidly.
According to Green — whose company has underwritten 2,000 loans to date and has been profitable for nearly two years — more than half the homes nationwide were constructed before 1980. North of 80 percent of homes were built before 2000.
Meanwhile, the popularity of TV shows such as HGTV’s “Fixer Upper” and “Fix or Flop” has convinced a crop of new investors that they, too, can make a quick buck in the business. And these investors are finding a captive audience in end users who don’t want to spend time — or money —rehabbing homes themselves.
“Mr. and Mrs. Homebuyer, they’re not as eager as they used to be to buy a home that needs a bunch of work,” said Steve Pollack, CEO of Anchor Loans, which has been a lender in the space for more than 20 years.
Ray Sturm, CEO of AlphaFlow — a three-year-old company that builds portfolios of home-flipping loans for high-net-worth individuals, hedge funds and private officers — said that until now, the fix-and-flip universe was a “bit off the radar.”
Sturm declined to disclose how much AlphaFlow has invested for clients, but he said the volume has tripled over the past year.
“These loans are all 12 months or shorter,” and they typically wind down after seven months. For investors, that means they’re getting their money back quickly if they want it. “So, when you get a short duration and a great return, that’s attractive,” he said.
In addition to Anchor Loans and LendingHome, some of the biggest players in the space include Civic and Genesis Capital — which was acquired by Goldman Sachs in 2017. (Genesis lent $1 billion in 2016.) “Wall Street continues to not only want to buy the loans, but invest in the equity side,” said Josh Stech, a founding partner of LendingHome, which has raised $166 million since launching in 2013.
The influx of institutional money into home flipping has fueled growth among national players. “They’re running to do as much volume as possible,” said Sturm. Anchor’s loan volume rose 7 percent last year, while the number of loans it underwrote grew 25 percent. Pollack said the numbers reflect a strategy of tapping new — and sometimes less expensive —markets.
Still, while the number of flips in New York City jumped 20 percent in the first quarter, other markets saw a drop. For example, Los Angeles and Miami saw the volume of flips fall by 3 percent and 16 percent, respectively.
Across all markets, home prices either fueled or dampened the flipping market. The jump in New York came as prices also rose — giving investors the market conditions needed to make a profit. The median price during 2018’s second quarter citywide was $660,000 — up nearly 33 percent from $497,000 in 2012.
“Flipping is back and it’s big,” said Caroline Nagy, deputy director for policy and research at the Center for NYC Neighborhoods, a nonprofit that promotes affordable housing.
In a June report, CNYCN analyzed roughly 2,700 home sales that were affordable to families making $85,900 or less. Of them, 38 percent were flips, the nonprofit found.
“One of the things we’re realizing,” Nagy said, “is that it’s not even people who are buying homes to live in. It’s investors.”
Startups like Opendoor, Offerpad and Zillow have sent ripples through the industry.
“They have fairly healthy balance sheets, so for every property they buy and finance themselves, it’s one less property a buyer or borrower of ours buys,” said Pollack.
Their not-so-secret weapon is data.
“We have access to sellers, we have data on buyers, we can reduce days on market because we can pre-market [properties] to a seller,” Zillow CEO Spencer Rascoff said during an April interview on CNBC. “So we have a lot of advantages here.”
Home-flipping startups have raised more than $751.6 million since 2016, according to data and research firm PitchBook.
Some of them include Knock, a New York-based home trade-in platform launched by former Trulia executives, which has raised $34.5 million since 2015.
In May, Perch — which is based in New York but trades homes in Texas — closed a $30 million fundraising round. The year-old company, which gives houses a “certified pre-owned warranty,” is also working to automate the closing process, said CEO Court Cunningham.
“We think we can get to a one-click close,” he said, describing the prospect of buying a house with the click of a mouse compared to trading and signing endless documents.
Cunningham said debt investors like the fact that companies like Perch flip homes in weeks. “We are sitting on inventory that’s an appreciating asset that people will lend against for 10, 20, 30 years,” he said. “So, it’s an attractive investment from a debt perspective.” On the equity front, there are few other industries with so much untapped potential, he said. “The only other alternative is to do it the old-fashioned way,” he said. “There’s a lot of green field.”
Opendoor, which uses an algorithm to buy and sell homes, is the giant in the space. The company is valued at around $2 billion after a $325 million fundraising effort this spring, which attracted such investors as General Atlantic LLC, Access Technology Ventures, Lennar Corp., 10100 Fund and Invitation Homes.
That cash infusion will be used to expand to 50 markets from 10.
“Our goal is to allow people to buy and sell real estate without any friction online,” CEO Eric Wu said at the time.
Shortly after Opendoor’s financing, however, Zillow made waves by announcing it would expand its pilot “Instant Offers” program, in which buyers can request a cash offer from Zillow. (After a quick face-lift, Zillow aims to sell the property at a higher price.)
“We think of it like Netflix moving into originals,” Rascoff said in the CNBC interview. He has since described the program as one that could become a “$1 billion profit opportunity annually” for the company. Meanwhile in May, Redfin said it would spend up to $25 million on home purchases, up from $10 million. But Redfin CEO Glenn Kelman has been more constrained than Rascoff.
“I know everyone’s excited, because Zillow got into it over the past few weeks or months,” he said during a May earnings call. “I am excited about it too, but that is a capital-intensive business.”
He said at some point, the market will turn and the cost of capital will be higher. “The fact that capital is so cheap right now has brought plenty of us into this business, but we’re just cognizant of what happens on the other side of that.”
Nonetheless, investors say new home-flipping startups are not exposed to real estate volatility. “The time they’re holding the property is pretty short; they’re not exposed,” said a principal of one VC firm, who was not permitted to speak on record. For example, Opendoor’s model works in almost any market because the company can use data to adjust its risk. (If analysts project a housing shock, for example, Opendoor would increase the discount it offers to sellers. In ebullient markets, it could invest more in renovations, or vice versa.)
“These businesses are so consumer focused,” said the investor. “We don’t often give them enough credit for that.”