With the fix and flip market successful in some parts of the country and not others, flippers should pay attention to the available inventory of distressed properties in the markets where they want to invest.
These figures can factor directly into a project’s return on investment for the fix and flippers.
Following lower inventory and continuing price growth trends, February existing-home sales increased 1.2% to a seasonally adjusted annual rate of 4.88 million, according to the National Association of Realtors. The figure also represented a 4.7% increase from that of February 2014.
Distressed properties selling for larger discounts
Distressed properties continued to make up 11% of total existing-home sales in February (unchanged from the previous two months). Of this 11% figure, foreclosures made up 8% while 3% were short sales.
The good news for flippers is that foreclosure and short-sale properties seem to be selling for larger discounts than before. Foreclosures went for an average discount of 17% below market value, an improvement from January, when the average discount was only 15%. Short sales also had a greater discount from the previous month, at 15% in February, compared to 12% in January.
The market remains largely focused on renters, however, as tightening supply and steady price rises mean that buyers are losing steam.
“Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” said Lawrence Yun, NAR’s chief economist. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”
NAR President Chris Polychron noted that the price increases were making life a bit more difficult for flippers. “Investor sales are trending downward due to the continued rise in prices and fewer bargains available from distressed properties coming onto the market,” he said.
He also noted that areas popular with foreign buyers, like South Florida and the West Coast, were seeing less demand from international buyers, due to the strengthening U.S. dollar compared to foreign currencies.
Distressed properties can still, however, represent good opportunities for flippers. The larger discounts for foreclosed and short-sale properties can represent profit potential, and the increased numbers of renters can mean not only that rental properties are currently the place to be, but also may also reflect pent-up latent demand of buyers.
A recent Zillow report, for example, notes that the rental vacancy rate fell steeply in the fourth quarter of 2014. As the report mentions, eventually “many of these renters will seek to become homeowners, which bodes well for home sales in the future.”
Other recent blogs by Lawrence Fassler:
6 reasons online lenders may be easier for investors to work with
Getting the money to finance your rehab project
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