Sometimes it seems that there is an endless stream of TV shows about home flips that battle for our attention. Many people have a favorite show, and they’re tons of fun to watch as they entice viewers to dream big about the changes they could make to their own homes.
This home-improvement fare does more than entertain. These shows have had a major impact on the home-renovation industry. For one thing, the programs have a tendency to make the renovations appear far easier to do than they are in reality. They also have helped to raise the expectations for just about everyone involved in the home-renovation industry — including fix-and-flip investors, the contractors doing the work and the buyers who eventually live in these homes.
Mortgage brokers should pay attention to this sector of commercial real estate finance. These activities continue to be popular and lucrative for all types of investors and lenders.
Small town, new life
For both veteran and novice fix-and-flippers, the newest area of opportunity is in smaller cities and towns. At this point, big cities have few affordable houses available to the typical investor. The vast majority of these properties are either occupied or are only attainable for high-end homebuyers.
Small cities, towns and villages, however, are becoming increasingly appealing. These rural areas have, for the most part, remained off the renovation radar, and they often include a strong stock of houses that simply need a skilled crew and an investor with an eye for design.
Fix-and-flip or buy-and-hold investors who care about these areas can help turn struggling small towns into bustling, family-friendly communities. Many renovators are embracing the importance of building strong ties with local residents. They’ve learned that these rental properties can be profitable investments as well as safe and comfortable homes for families that otherwise would not be able to afford them.
These areas may lack enough homes for first-time homebuyers, which means that potential new residents and families are lost to neighboring towns. Investors can help reverse this trend of small-town flight by refurbishing single-family homes and rental properties, breathing new life into overlooked and struggling areas that deserve a second chance at success.
As many real estate investors know, single-family homes — especially ones that go to entry-level buyers — are the anchors of any stable and desirable neighborhood. These homeowners take good care of their properties and tend to stick around for more than a few years.
In terms of mortgage financing for these investment properties, borrowers with less experience should explore several routes, from banks to hard money lenders. Beginners may not have the credit scores that traditional banks require, but that doesn’t have to stop them. In fact, traditional banks are often too expensive due to multiple fees, which makes them a less-than-ideal option for loan originators who are serving new borrowers.
Many new investors wind up pursuing creative financing by working with hard money lenders. These lenders are often high net worth individuals who focus on short-term mortgages. They charge higher interest rates but can close deals much more quickly than a bank.
Commercial mortgage brokers also can benefit from the renovation trend by seeking out clients who are skilled fix-and-flippers. Homebuyers make a single home purchase, on average, every 10 to 15 years. Fix-and-flip investors, however, may need financing for multiple deals in a 12-month period for several years running.
Brokers who are able to build solid, long-term relationships with investors also may be able to offer their services to consumer-purpose buyers who end up purchasing the finished flips. It can be a truly symbiotic relationship.
About 10 years ago, some fix-and-flippers could get away with minimal renovations and shoddy work while still selling their properties for a profit. But this has changed. Many of the people who were only in the home-renovation business for a quick buck have moved on. Today, home flipping is being recognized as a creative endeavor that requires plenty of dedication and elbow grease.
Those who have stayed in the industry have tended to step up their game, evolving into savvy investors with strong design instincts and enviable project-management skills. Many are dedicating themselves full time to the industry. The result is that many modern renovation projects have such high quality that homes wind up looking almost like brand-new construction.
Many structures have new roofs, windows, furnaces, kitchens, bathrooms or granite countertops — all the high-end touches that style-savvy buyers crave. And these aren’t million-dollar houses with unlimited budgets; they’re modestly priced homes in the $150,000 to $250,000 range that are being renovated for the low- and middle-income homebuyer markets.
A more surprising shift among investors is the move away from fix-and-flips to fixing and renting. Once seasoned investors have tackled a few flips, they often decide they’d like to offer these beautifully remodeled properties to responsible renters. Some of them even focus their renovation and rental efforts in blighted areas where they can help turn run-down neighborhoods into friendly, welcoming places.
Another emerging trend is the influx of retirees entering the business. While this may start as a fun hobby, some retirees get bitten by the fix-and-flip bug. Many of them recognize that real estate investing is a great way to learn something new, make a difference and earn some extra cash along the way.
These newcomers, however, can find the fix-and-flip process to be quite overwhelming. One of the biggest challenges for a small investor — someone who tackles three to five houses a year — is to find reliable help. The contractor business used to be generational, handed down from parent to child. But this is changing as fewer children are following their parents into the carpentry trades.
The result is that some family-owned contractors are dying off. The ones that remain are often booked for months in advance, making it tough for newer investors to get their renovation projects started.
Another wild card is the rising costs of building materials. With the COVID-19 pandemic disrupting supply chains and employment, homebuilders have seen material expenses skyrocket. Appliances, furnaces and cooling units have experienced drastic price shifts over periods of a few days or weeks, causing new investors to panic over budgetary changes. These inflated prices aren’t expected to last, but it may take time for supply chains to catch up to demand and for labor shortages to subside.
The cost of lumber more than tripled on a year-over-year basis this past spring, adding $36,000 to the average cost of a new single-family home, the National Association of Home Builders reported. Although lumber costs have leveled off in recent months and increased sales prices for finished flips have helped to make up the difference for investors, it’s still been difficult for many in this sector to deal with the fluctuations.
Renovating a home will never be as slick and simple as it appears on TV. But the investors who pay attention and make smart choices will always find a good deal, regardless of who they are, where they live or any challenges the economy may present. ●