On the Radar: Top Flip States | Think Realty | A Real Estate of Mind
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On the Radar: Top Flip States

A year in review of biggest gains and busiest markets

Residential real estate was the hot ticket in 2020. Tight inventory meant bidding wars, price increases, and properties were pending and sold in record time. As we jump into the new year, let’s review where the biggest gains occurred and where investors were the busiest as we plot the year ahead.

Largest Increase in Sales

News headlines continually covered the lack of real estate inventory across the country. Despite the lack of inventory, 2020 was a very exciting year nationally for real estate sales. Reviewing the residential sales data capturing sales from both the listed and unlisted off-market, only three states — Indiana, Maryland, and South Dakota — did not experience double-digit sales growth in 2020.

Of the top 10 states that experienced the largest percentage increase in sales growth, Idaho, Minnesota, Iowa, and the Washington DC markets were the only states that had increased sales two years running. The remaining six states reversed negative sales trends in the prior year, making the growth more impressive. For example, Montana had a 65 percent decrease in sales from 2018 to 2019, only to see the pandemic drive sales past 2018 levels. (see fig. 1)

Volume of Sales

The percentage of change for residential sales in Idaho and Montana show markets with more open space were a draw in 2020. However, populous states had an impressive year.

While Florida ranked 29th in percentage change, it did post the highest volume of sales with an increase of more than 180,000 properties and over 500,000 total residential sales. Texas followed with an impressive 104 percent increase in sales nearly reaching 500,000 sales. California followed with an increase of 27 percent and reversed its negative trend from the previous year, showing an impressive rebound. (see fig. 2)

Top Flipper States

So where were flippers busiest last year? Flip volumes closely followed overall sales trends in more populous states. Texas topped flipper volumes and doubled its flip volume in 2020. Florida and Georgia round out the top three with double-digit gains for the year.

Out of the top 10 states with the most flip activity, only Arizona has had a steady and consistent flip volume over the past three years. (see fig. 3)

What makes the 2020 rebound for these states even more interesting is that Main Street investors picked up the slack from Wall Street-backed iBuyers during the pandemic. iBuyers like Zillow, Opendoor, Redfin, Knock, and Offerpad, which buy homes directly from owners to resell rather than just listing them, operate in many of these states. When Covid first hit, most iBuyers stopped buying, or slowed significantly buying and their volume was down almost 50 percent for the year.

Arizona, ground zero for iBuying activity, is a great example. Flipping activity, which includes iBuyers, was only down 0.5 percent for the year, despite a significant drop in iBuyer purchases. (see fig. 4)

iBuyers gradually came back to the market over the summer and 2021 will likely see iBuyers returning to pre-pandemic levels. In addition, other proptech companies and real estate brands are launching their own versions of the all-cash, as-is offer. We expect local investors will continue to see increasing competition in 2021.

Some are watching the current exuberance with a feeling of déjà vu. The unexpected gains and speed of the market feel similar to 2006.

Melissa Shea, President of the Long Island Real Estate Investors Association shared, “One investor had a Long Island flip shown to 150 qualified buyers and sold for well over asking.”

Like many other suburbs outside of large urban centers, Long Island has seen migration from city dwellers looking for more space. Home is now a place to live, work, play, and educate. Clean, vacant inventory is selling quickly, and flippers have the right inventory to show qualified buyers that are serious about planting roots.

Even if new buyers are forced to return to a hybrid work model where they need to return to work a few days per week, homeownership will likely outweigh the inconvenience. They will spend less time in traffic every week, have more money to spend, and enjoy a better quality of life with that newfound time and savings. Some may even risk mass transit inconvenience if they only have to commute a handful of times per week.

Things to Watch That Could Impact Real Estate

As vaccines roll out and hopefully see the pandemic subside, investors will watch how and where people work. Will businesses continue the work-from-home movement, offer hybrid models, or scale back remote work dramatically? There have been enough public announcements from major companies to know it will never go away entirely. As long as remote work remains viable, real estate investors should have more opportunities in secondary and tertiary markets as more buyers look to escape high-dollar urban centers and jump into homeownership.

Biden announced during his presidential campaign that real estate would not go untouched under his administration. He announced early potential changes in real estate tax benefits as well as focusing on making ownership more accessible.

Biden’s scrutiny of the 1031 exchange is the most concerning for real estate investors. Deferral of capital gains via the 1031 exchange is one of the industry’s favorite tax strategies. Biden is considering ending benefits for those with incomes over $400,000. Some speculate this would drastically slow real estate development, but it’s not clear how drastically it would impact Main Street investors. But, for investors that meet the $400,000 income threshold, the change could arrive as the US and many states are forced to increase income tax rates to plug badly beaten budgets.

Biden is also in favor of two other initiatives that should have real estate investors ecstatic. Millennials have postponed real estate ownership, with industry experts blaming college debt and saving for a down payment as to why they are late to the ownership game. If Biden comes through with a combination of college debt forgiveness on top of a $15,000 first-time tax credit, it could ignite a new wave of hungry buyers. They would land in a market that is short on inventory along with life-time low-interest rates. What will that do for prices? We believe that will push prices higher, and affordability lower.

Interviewing experienced real estate investors around the country, one word that continually comes up is “cautious.” For those around a few cycles, the simple mission is to leave yourself a lifeline. Not buying into the hype, closing solid deals, and focusing on multiple exit strategies is a wise approach in 2021 as we deal with a few unknowns.

With so many struggling, distressed sales may rise in 2021. However, with foreclosure and eviction moratoria, these will happen either as traditional listings or off-market sales, rather than on the courthouse steps. So, investors will continue to thrive in the world of off-market deals as we have for the last several years.

Aaron Norris is VP of Market Insights with PropertyRadar. He writes and speaks nationally on data, trends, and technology. He’s a licensed real estate and mortgage broker and has been in the industry since 2005.