How the 2020 Pandemic Shaped the Fix-and-Flip Industry
The worldwide pandemic wreaked havoc on many industries, and real estate investing is no exception. From the early lockdowns to a lingering economic struggle, fix and flip investors have had a difficult time finding good deals and staying ahead of the competition. These five categories show how COVID-19 affected the industry in 2020 and beyond.
1. Low Housing Inventory
Real estate experts predicted that 2020 would be a year with low housing inventory, but no one could have guessed how much it would drop. In fact, the number of available houses decreased almost 40 percent from 2019, according to the National Association of Realtors. At first, the inventory shortage got worse from homeowners quietly taking their homes off the market amidst the growing panic and business closures. Those who might have considered selling in 2020 decided to wait and see when the pandemic might pass. The other major factor was the massive population migration from urban to suburban areas, where people fleeing the cramped cities began buying up the available housing inventory. For flippers, this meant fewer options to purchase and rehab.
2. Moratoriums on Foreclosures
Experienced fix and flip investors know that the best way to get a good return on a project is to buy at a discount. The moratorium on foreclosures, implemented by the Department of Housing and Urban Development early in the pandemic, put a roadblock on this popular path for finding a good deal. Short sales, foreclosures and auctions are some of the best ways to purchase property at a lower price. Since flippers plan to perform a complex set of renovations on the home before listing it again, they do not need to buy one that is recently upgraded or move-in ready. The moratorium contributed to lower housing inventory overall, but particularly for the kinds of properties that benefit fix and flip investors.
3. Hard-to-Find Deals
People who have been flipping houses for years know that the best deals often do not show up on the MLS. With statewide closures and limits on non-essential activities such as networking events or property walkthroughs, many investors found it difficult to scope out a project, much less make a deal. On top of these closures, the stifled economy created a one-two punch that left real estate experts wary of what was to come. In the pandemic’s early months, it was hard for even the most experienced investors and lenders to know how much profit they could expect from a successful flip. Additionally, investors in many areas were now competing for properties with a new wave of home buyers that were previously renters in the city.
4. Plummeting Mortgage Interest Rates
As the economy struggled with record-high unemployment, opportunities began to rise from the ashes. The Federal Reserve uses interest rates as a tool to keep inflation in check. When the economy is booming and home prices dramatically increase, interest rates go up. In 2020, Freddie Mac observed that the already-low interest rates plummeted almost a full percentage point, from about 3.7 percent to 2.8 percent on a 30-year fixed-rate mortgage. The decrease aimed to stimulate the economy and shore up the housing market by encouraging renters to buy a home while pushing current homeowners to upgrade. The current rates create the potential for fix and flip investors, assuming that they can find a property to flip.
5. Rebound on New Construction Starts
While inventory on existing homes began a slow rebound at the end of 2020, residential new construction numbers showed a completely different reaction. HUD research noted that permits and starts for new construction dropped by more than 40 percent at the start of the pandemic, with an abrupt rise once states began to open again. Completions remained relatively stable by comparison. This data reflects a change in the way that new construction investors saw the pandemic. They did not want to start something new, but were willing to continue working on existing projects. As a competitor to flippers, new construction did not suffer the same kinds of delays as the existing housing market, making that competition stronger.
As a real estate investment, fix and flip offers lots of potential despite the many obstacles created by COVID-19. With the market continuing to rebound, these challenges may gradually go away, allowing investors more access to viable flipping projects.
Author Bio: Eric Krattenstein’s extensive marketing experience began at a boutique marketing agency where he developed dozens of successful innovative marketing strategies for brands ranging from startups to Fortune 500s. Prior to joining Asset Based Lending in 2016, Krattenstein served as U.S. Chief Marketing Officer for a European enterprise software company where he spearheaded the company’s expansion into the United States and Canadian markets. In his current role as Chief Marketing Officer, Krattenstein leads Asset Based Lending’s Sales and Marketing team that helps upward of 40 to 50 real estate investors close hard money loans each month.
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