Daren Blomquist talks metrics, warning signals, and where certain markets may be changing the "rules" for flipping.
As the resident expert on foreclosure statistics and trends at real estate data giant ATTOM Data Solutions, Daren Blomquist, the company’s senior vice president for communications, spends a lot of time focused on trends. “I’m always looking for indicators about where the housing market is going,” he said. “Sometimes I’m looking on a national level and sometimes on a neighborhood level.”
Think Realty Magazine sat down with Blomquist to talk developing trends for the second half of 2018, including how he uses data on flipping to identify a number of interesting local and national emerging trends and housing indicators.
ATTOM Data releases a lot of information on house-flipping trends. Why is that particular investment strategy so notable?
Home flipping is a great barometer for state of the overall market. Home flipping needs to be at a level that is “just right.” If it’s too hot or too cold, something is off in the overall housing market.
About 10 years ago, we had this overheated, over-speculative housing market. One indicator of that situation was flipping, which had gotten too hot. If we see that happen again, that will be another warning flag that we’re getting into a market that is ripe for a downfall.
On the other hand, flipping can be a very good, positive indicator, in moderation, of a healthy housing market that is seeing a lot of demand and that is seeing housing stock being renovated and brought up to modern taste and modern style.
If you go down to the neighborhood level or the ZIP code level, flipping is a great indicator of a neighborhood on the upswing that is improving.
Finally, from the investor perspective, there is a very obvious application for home-flipping data as well: understanding which markets are better for flipping homes! It helps investors make decisions about which markets are right for that investment strategy, which are overheated, and which may be overcompetitive. You can also use this data to uncover the “secret” markets that are right for flipping but that maybe a lot of investors have not yet identified.
What additional indicators or facets of these flipping metrics should investors think about on either a local or a national level?
Home flippers should start out just looking at the overall rate of home flipping. On a national level, our data indicates we are at about 7 percent of all sales being home flips. I would say if we start getting back into the territory of 9 percent, it could be a warning flag. Just a couple of percentage points up can make a difference. Locally, if home-flipping rates go into double-digits in their market area, that is definitely a warning flag to proceed with caution because the market could be getting over-speculative.
I would also look at the gross profits, which are calculated by finding the difference between the purchase price and the sales price. That number does not include all the expenses involved in flipping, but if you look at the percentage return from the gross profits take note of whether the number is growing, shrinking, or holding steady. Nationally, that number has started to shrink over the past few quarters. That is a sign to me that the margins are shrinking and, therefore, not as good as they used to be for home flippers.
In some markets, the margins are so tight that I would stay out completely. Interestingly, those tend to be markets that are very popular with flippers because people naturally have a group mentality that says, “Everybody else is going there, so it must be a great market.” If you look at the margins on paper, though, you will see that some are very risky endeavors.
One more thing I look at is the average discount home flippers are getting when they purchase properties. I believe that number is really important for investors. Nationwide, flippers are purchasing at a 24 percent discount from the after-repair value (ARV). That is fairly decent, but I would generally say to look for markets and properties where you can get a 30 percent discount (or more) on the front end. In some markets, however, flippers are getting much smaller discounts, like 11 percent. Those markets are actually very popular markets, but that small upfront discount means that something else is going on in that market that is affecting the numbers. It could be speculation or even a new investing model going on there that basically is changing the “rules” on what local investors will accept when they buy. If you are thinking of investing there, you have to have an idea what is causing that behavior.
3 flipping indicators every investor needs to know:
Overall rate of flipping
Gross profit margins
Average "discount" on initial purchase
Daren Blomquist serves as senior vice president of communications at ATTOM Data Solutions, a multisourced national property data warehouse cited by thousands of media outlets each month. Learn more at ATTOMData.com.