The Future of Fix and Flips: Navigating 2024’s Real Estate Challenges

Since the peak in the first quarter of 2022, the number of home flips nationally has been on a steady decline. With the rapid interest rate rises that started at the end of the first quarter of 2022, sales volume nationally took a nosedive, and the rate of home flipping started on a downward trajectory.

For those new to the concept, home flipping involves purchasing a property and reselling it for profit, often after making significant repairs and improvements. Understanding your financing options, such as through our Fix and Flip Loans, is crucial to success in this venture.

Challenges Posed by Overvaluation and Market Saturation

Stagnation in Property Sales and Impact of Rising Rates and Value Decline

Many home flippers were stuck holding flips they couldn’t sell at the end of 2022 and throughout 2023. This is due in part to higher interest rates that began to freeze home sales volume, but also due to properties going down in value from the time they were purchased, to the time when they were resold. This downward trend in prices, combined with increased holding time frames, has caused many home flippers to lose money .Navigating the financial landscape is key for flippers, especially in challenging markets. Learn more about your options with our guide on Hard Money 101.

Particularly for home flippers that flip multiple properties at the same time, many were stuck holding multiple homes they could not sell. This downward trend in prices has also hurt the hard money lenders that loaned to home flippers in 2022 and 2023. Many of these new and eager hard money lending funds loaned way too much on these homes. The high loan to value ratios on these properties prevented many home flippers from refinancing them with long term financing.

What does 2024 and 2025 hold for home flipping in the U.S.? Many expect interest rates to go down in 2024, which would unfreeze sales and may increase the number of home flips in 2024 and 2025. However, many experts remain pessimistic that rates will go down in 2024, given the booming U.S. economy and persistent inflation. But it’s more than interest rates that will affect the home flipping game in 2024, so stick around as I discuss some of the factors that I believe will make or break home flippers in 2024 and 2025.

The Evolution of the Fix and Flip Market

The Role of Media in Home Flipping Popularity

Introduction to Home Flipping
Home Flipping is a term used to describe purchasing a property and then reselling it for profit. The term “fix and flip” refers to fixing up a property, e.g. making repairs and improvements, and then reselling it for a higher price later. Home flipping went bananas in the years leading up to the Global Financial Crisis. The number of homes being flipped nationally was at a record level in 2005 due to easy credit terms and low interest rates.

As the market evolves, so do the financing options available to investors. Our Bridge Loans provide another avenue for those looking to navigate the gap between purchasing and selling properties

Regulatory Changes and Market Impact
In 2006, HUD created a new regulation which imposed a legal requirement that you must own a property longer than 90 days between purchase and resale in order for that property to qualify for a FHA loan. This requirement was pretty much removed in January 2010, which opened the floodgates again in 2011 when the number of homes flipped nationally began to increase significantly.

Media Influence on Home Flipping
After 2012, a number of television shows launched that glamorized home flipping. These Hollywood story versions of home flipping enticed a larger number of people into the fix and flip space. Shows like TLC’s “Flip That House,” and HGTV’s “Flip or Flop”, among a dozen similar shows, made home flipping seem so easy that anyone could do it.

The Hype and Reality of Home Flipping
Often understating their true project costs, and exaggerating profit margins, these shows hyped home flipping to another level. As a result, thousands of aspiring home flippers entered the home flipping market in 2015, which was another contributing factor to the increase in the number of homes flipped from 2015 to the peak in 2021. 

Education and Scams in Home Flipping
Prospective house flippers started to pour money into multilevel marketing programs like “Renatus” and real estate education platforms like “Fortune Builders.” In response, a flurry of real estate education seminar firms, such as “Nudge/Response Marketing,” sprung up, hoping to profit millions from those seeking the “insider’s track” to house flipping. With titles like “Power Flip” and “Flipping for Life,” scammers like Nudge/Response Marketing lured prospective house flippers into expensive seminars in order to upsell them on even more expensive real estate investing courses with price tags as high as $30,000!

Trends and Changes in Home Flipping Volume
The number of homes flipped nationally increased steadily from 2015 and reached record levels never seen in U.S. history by 2021. The number of homes flipped nationally in 2021 even surpassed the record levels achieved in 2005, right before the Global Financial Crisis. In the first quarter of 2022, the number of homes flipped nationally reached an all time high. As soon as interest rates started to increase in March of 2022, the number of homes flipped nationally has declined steadily into 2024.

Evolution of Fix and Flip Financing

Entry of Institutional Investors Impact on the Market

In 2016, institutional investors entered the single family home market in a major way. Since 2016, the percentage of single family homes purchased by institutional investors has increased every year. This has created competition for home flippers, who are far less capitalized as compared to deep pocketed, institutional investors. This has also contributed to low inventory levels of single family homes under $300,000. This is because institutional investors purchase lower priced homes to hold as rental properties, thereby removing them from inventory altogether.

Hard Money Lenders Saturate Lending Market and Expand Financing for Flippers

From 2017 to 2022, there was a rapidly growing number of newly formed, hard money lending companies that were setting up to lend to home flippers. Hard money lending funds like Temple View Capital, RCN Capital, Lima One, and others, were offering leverage of 90% of total project cost (purchase + rehab cost) during the boom time from 2017 to 2022. And even more lenders followed suit, resulting in a glut of fix and flip lenders from 2020 to 2022 that created an oversaturation in the fix and flip lending market. Fix and flip investors took advantage of the increase in capital availability, which fueled a fix and flip boom up to the peak in Q1 2022.

Increased Competition from Wholesalers
Along with the increase of fix and flip lenders, also came an increase in the number of real estate “wholesalers” who sell properties to home flippers at a profit. As more wholesalers entered the market from 2018 to 2022, competition among them increased. As a result of increased competition, wholesalers increased their profit margins from an average of $10,000 profit per property, to as high as $50,000, or more. In fact, many home flippers have complained that it’s been the ever-increasing profit margins of wholesalers in recent years that has devoured their profit margins.

The Emergence of iBuyers
And with the boom in home flipping, also came the notorious “iBuyers” who wanted a piece of the “fix and flip” pie. These were the internet based, fix and flip buyers, like Opendoor, Offerpad, RedfinNow, and Zillow Offers. iBuyers use internet based software to make instant offers to home sellers who had listed their homes online. Sellers received electronic offers to purchase from iBuyers with the promise of no hassle, fast closings.  iBuyers purchase properties and then “flipped” them for a higher price, exactly like a regular home flipper, but at scale. As the median home price nationally came down in 2022, many iBuyers were out of business overnight and found themselves holding thousands of homes that they could not sell for more than they purchased just a few months before. 

Challenges Facing Flippers and “Fix and Flip” Lenders

Impact of Rising Interest Rates on Home Flipping

When national home prices took a dive in 2022, many of these new, “fix and flip” lenders that were offering such high leverage got a reality check. So many of these funds were, and are, run by inexperienced fund managers who weren’t investing before the GFC, or run by overconfident ex-stock traders, that simply lacked the knowledge and expertise to float the boat in low tide. Many were just lending other people’s money, running amok, and making millions on the rising tide, never noticing that the tide was slowly going out. 

The Freeze in Real Estate Sales
Many of these funds were sitting ducks when real estate sales began to freeze up in 2022. For those hard money lending companies that obtained their funds from the secondary market, the rising cost of capital in 2022 was making them even less competitive in an oversaturated market.

Hardships for Home Flippers
Many of these lenders found themselves holding overleveraged loans on properties without an exit, because the properties weren’t selling. And because the loan to value ratios were so high, they could not find a refinance either. At the time this article was written, February of 2024, many of these same lender’s loan portfolios are in shambles due to a frozen real estate market. Loans made at 8% in 2021 that were supposed to be 12 month loans, ended up being 24 month loans in a rapidly rising, interest rate environment. 

For home flippers with homes that won’t sell, the interest on these hard money loans continues to pile up, making their situation worse. This will force many of them into foreclosure and their lenders will have to own the properties at levels where they won’t be able to recoup their interest, and in some cases, their principal. 

Persistent High Prices and Competition
Despite the escalating interest rate environment of 2022 and the first half of 2023, home prices nationally really didn’t go down very much during that time frame. It is not so much that we have a low inventory of homes for sale, it’s more that we have a low inventory of “affordable” homes for sale. Prices of single family homes are at the highest level in U.S. history, and higher interest rates for the past two years haven’t done a lot to change that in many areas of the country.

The Continued Struggle in 2024 and Beyond for Flippers

Persistent High Interest Rates and Their Impact
The elevated interest rate environment has dramatically decreased national home sales volume in 2022 and 2023, reaching lows at the end of 2023 not seen since 1995. This slowdown extended the duration of time from purchase to resale for fix and flip investors, leaving many with unsold properties acquired in the spring of 2023 and earlier. Despite these challenges, high home prices persisted, squeezing the profit margins of flippers for the foreseeable future.

Inflation and Interest Rate Outlook
With overall inflation still stubbornly high, particularly services inflation, the Federal Reserve doesn’t have any incentive to lower interest rates. And unless inflation gets under control in 2024, rates won’t go down. This means home sales volume will stay largely unchanged in 2024, and as a result, the number of home flips nationally may continue to decline in 2024. 

Rising Costs in Construction
The cost of construction, materials and labor, has not seen much deflation since interest rates began increasing in March of 2022. This has increased the cost basis for home flippers, further reducing their profit margins. In fact, besides wholesalers who are taking most of the meat off the bone for home flippers, the cost of building materials and labor is another factor that is eating up home flipper’s profit margins.

Increasing Competition in the Market and The Impact of Institutional Investors
Another challenge that home flippers face is more competition than ever before. I already mentioned the entrance of institutional investors into the single family home space that has created competition for home flippers. The higher interest rate environment of the past two years has not caused a massive flight of institutional investors away from the single family homes market, in fact, they are still a driving force of competition for home flippers. Institutional investors have reduced home inventory, which has been a factor that has kept home prices still at historically high levels, threatening home flippers profit margins. And with access to endless pools of capital, institutional investors could put many home flippers out of business in 2024.

Emergence of Newbie Flippers
The wave of real estate education platforms that appeared from 2018 to 2021 has produced thousands of newbie home flippers that are eager to get their first home flip deal under contract. The wave of newbie real estate investors has created a ton of new competition for experienced home flippers in recent years. 

The Role of iBuyers
Despite setbacks in recent years, iBuyers remain a formidable presence in the flipping market. Leveraging technology and substantial capital, they are able to swiftly make offers on properties, potentially outmaneuvering traditional flippers. As iBuyers continue to refine their processes and reduce operational costs, they are expected to capture an increasing share of the market, further escalating competition for independent flippers.

Maximizing Your Fix and Flip Success: The Power of Networking and Building Strong Relationships

In a highly competitive environment for home flippers, networking is more important than ever. Institutional investors and iBuyers don’t have access to local real estate networking where many deals are made. Examples are local real estate associations and clubs where real estate professionals gather to network, exchange deals, and make connections. It is in these environments where many fix and flip deals are found and made. As competition stiffens in the home flipping game, these local networking opportunities will be a crucial factor in a home flipper’s success. 

The most successful home flippers always cite “relationships” as a key factor in their success. Building strong relationships is key to finding and capitalizing on the best deals. Discover how real estate rehabbers can resell properties for a premium, showcasing the power of networking, in our detailed post here.

It’s the relationships with realtors, lenders, contractors, and other real estate investors that newbie competitors, institutional investors, and iBuyers simply don’t have. And it’s these key relationships that will make the difference in 2024 and beyond for those home flippers that stay in business, and those that don’t. 

Expanding Funding: Key to Home Flipping Growth

The Intensifying Competition Landscape
Competition will only grow more intense if interest rates do head downward in 2024 and 2025. Home flippers will be competing with, not only eager home buyers, but also, institutional investors, iBuyers, newbie real estate investors, cash buyers, and foreign direct investors with cash. 

The Crucial Role of Funding in Home Flipping Success
In order to succeed at house flipping in 2024 and 2025, real estate investors will need to be able to compete, and having funding is essential. Hard money lenders like me create that funding for home flippers. And with a glut of “fix and flip” lenders that have appeared since 2018, there is more funding available for fix and flip investors than ever before in U.S. history.

The Advantage of Diversified Financing Strategies
Home flippers that limit themselves to one lender, won’t be able to scale as quickly if the real estate market does unfreeze in 2024. Many sellers that wanted to sell, held off from selling in 2022 and 2023 because of higher interest rates. If rates do go down in 2024, a lot of pent up inventory may hit the market in a short period of time, and there may be more than one opportunity available at any given time. For home flippers with relationships with multiple hard money lenders, it will be much easier for them to scale and do more than one deal at a time. 

Navigating Seller Hesitancy in a Shifting Market
Even with potential rate decreases, the market may not instantly heat up. A “wait and see” approach from sellers, anticipating further rate drops, could maintain a lukewarm sales environment well into 2024. Flippers will need to navigate this uncertainty carefully, balancing the eagerness to invest against the risk of a sluggish market rebound.

Smart Strategies to Reduce Risks in Fix and Flip Projects

Skill in Evaluation and Cost Management
Experienced home flippers also have an edge on newcomers into the home flipping scene. They are able to evaluate an opportunity faster, determine costs of rehab more accurately, and take advantage of higher profit margins as a result. To be successful at home flipping you need to understand the market, neighborhood characteristics, and have relationships with both realtors and local contractors.

You also need to be able to keep your costs under control to maximize profits. Because beginner home flippers lack the experience, they will pay higher prices for homes, pay more to renovate the homes, and have less profits as a result. This will result in deterring many of them from continuing in the home flipping business, and will give even more of an edge to experienced home flippers.

Understanding the ins and outs of rehab loans is crucial for managing your investment and reducing risks. Find out how rehab loans work and how they can be a game-changer for your flipping strategy.

Balancing Flipping with Stable Employment
As home flippers gain more experience, they often fall into the trap of taking on too much. As a hard money lender to real estate investors, the biggest cause of failure that I’ve seen is taking on too much at one time. If one home doesn’t sell as quickly as anticipated, it can cause a domino effect for a home flipper that can lead to a rapid free fall.

In 2024, my advice to experienced home flippers is to find a day job and make home flipping a side gig until we can see that sales volume nationally has started to rebound.

Dynamic Pricing to Facilitate Sales
And for those home flippers who are holding flips in 2024 that are hangovers from 2023 (or even 2022), reduce the price until the home sells. That means, lower the price every, single day if that’s what it takes to get the house sold. Particularly for home flippers who have hard money loans on properties they can’t sell, they should cut their losses early and sell at a lower price rather than hold onto a property that costs them more for every day that they hold it.

Negotiating with Lenders
For those that are unable to refinance and hold the homes as a rentals because their hard money lenders gave them too high of leverage, they should consider negotiating with their hard money lenders for reduced loan payoffs so they can refinance.

Predicting the Winners in Home Flipping for 2024 and 2025

Advantage of Focusing on Median-Priced Properties
The most successful home flippers in 2024 and 2025 will be those that can purchase and rehab homes below or near the median home price. Homes priced under $350,000 are still selling quickly, and some for over asking price. However, this is the same home price category being targeted by institutional investors who want to buy and hold the lower priced homes as rentals. This is where local networking and relationships will give home flippers an edge on institutional investor competition. 

Cost-Efficiency in Renovation
Home flippers that know how to not “over-improve” a property for its target demographic will also have success stories in 2024 and 2025. This is because of the persistent inflation in construction materials and labor.

These items are at a premium, and with so much demand in the construction sector that has remained strong even in a higher interest rate environment, expect inflation in building costs to continue. For home flippers that correctly identify what their target demographic is looking for in terms of updates and improvements, they will save significantly on the rehab costs as compared with new market entrants.

The Role of Capitalization and Lender Relationships
The winners in 2024 and 2025 will be well capitalized and have good relationships with multiple hard money lenders. Institutional investors have unlimited access to large amounts of capital, and can pay cash for properties. In order to compete with them, home flippers need to be well capitalized.

Reconsidering High-End Flips
Home flippers that target luxury home flips of $750,000 and above will continue to suffer in 2024 and 2025 as they have done in 2022 and 2023. In many U.S. cities, in response to the pandemic migration trends, home builders created a glut of homes priced over $1 MM.

This means that home flippers who targeted luxury home flips have been competing with new construction homes over the past several years. And because many of these new construction, luxury homes are still sitting on the market as we enter 2024, luxury home flippers will continue to compete with brand new builds. Bottom line, home flippers who are considering getting into luxury home flips in 2024 should probably think again. 

Upcoming Trends in Home Flipping: What to Expect

iBuyers’ Impact on the Fix and Flip Market

Targeting affordable homes for renovation is a trend that will yield high margins for home flippers in the coming years. One example is flipping mobile, or manufactured, homes. This requires skill in carpentry and improvisation, but given the lower price point of the finished product, there will be a steady demand for these affordable homes. 

Home flippers also may need to change their business models to survive if the real estate market stays frozen, margins stay razor thin, and competition remains high. For example, changing the business model from a “home” flipping business, to a “property” flipping business. Properties that can be rented by workers, veterans, or members of an aging population are in high demand. One example of a “property” flipping business model is the conversion of a motel into an affordable housing property for local workers. Once the property is renovated and rented out, a flipper can sell it for a profit to a long term hold investor. 

Wrapping Up: Key Insights for Future Home Flipping Success

Recap of the Boom Years
The fix and flip market thrived from 2015 to 2022, buoyed by factors such as low interest rates, an abundance of funding options, increased competition, the rise of iBuyers, widespread real estate investment education, and the media’s glamorization of flipping.

Challenges Since 2022
The landscape shifted in 2022 with rising interest rates leading to a significant decrease in home sales volume. This slowdown has left many flippers and their lenders with unsellable properties, directly impacting profit margins.

Impact of Market Conditions on Profits
The number of homes being flipped in the U.S. has been on a steady decline since 2022 when interest rates started to go up. An extremely low volume of home sales has prevented home flippers from moving properties quickly. As a result many home flippers, and their lenders, are holding properties that cannot be sold or refinanced.

And then profit margins of home flippers have been eaten into by a variety of factors including the increase in the number of, and profit margins of, wholesalers, inflation in the cost of construction materials and labor, and the longer holding times which require more interest to be paid on the underlying hard money loans. 

Strategies for 2024 and Beyond
If rates do go down in 2024 and 2025, home flippers need to be well capitalized as compared to their competitors. This will allow them to not only compete with buyers with deep pockets, but will also help them scale their businesses faster if the opportunities arise.

Adapting to Market Realities
If interest rates stay at 2023 levels for most of 2024 and 2025, home flippers should consider targeting affordable homes to remodel and stay away from luxury home flips. They may even consider changing their business models from home flipping to property flipping. 

Diversification of Funding Sources and Managing Costs
Success will likely favor those who diversify their funding sources, manage construction costs efficiently, and refrain from over-improving properties.

Building Strong Networks
Establishing and nurturing relationships within the real estate community will enhance competitiveness against iBuyers and institutional investors, providing a strategic advantage in the evolving market.

Ready to dive into your next fix and flip project but need financial guidance? Don’t hesitate to contact us for personalized advice tailored to your unique investment needs.

Copyright © Corey Ann Dutton, Private Money Utah, Wolf Creek Mortgage, Inc. This content may not be reproduced in any form without the explicit, written permission of Corey Ann Dutton.

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