Flip Volume Down, But Profits Up, Especially in Southern Markets

Since the first quarter of 2022 when the percentage of flipped homes sold peaked at 9.9%, the flipping market experienced a slowdown. Flipping rates dropped down to 8% in the second quarter of 2023, lower than they have dropped in the last three years.

Though the historical patterns of flip rates were considerably below Q2 2023 numbers, the overall trends have demonstrated an upward trajectory and took a large jump at the start of the pandemic.

However, the pandemic years proved challenging for fix and flip investors as rising construction costs and delayed materials dug into their profits. With those issues being less of a concern today, real estate investors are realizing better returns on their investments, particularly in the southern states.

Shifting Flipping

During the second quarter of 2021 real estate flippers were seeing gross profits around 61%. This was a period when investors were seeing peak profits, taking advantage of the market while mortgage rates were plummeting, and before housing prices skyrocketed. For real estate investors these conditions presented the perfect recipe for success.

Since then, fix and flip investors have significantly slowed down and traditional home sales have once again overtaken the market. More and more, as interest rates on mortgages are increasing to the highest levels in more than a decade, investors are leaning on their own liquidity and hard money financing to purchase properties. In fact, in Q2 2023 62% of homes flipped were purchased by investors in cash.

Areas with the highest percentage of flips in Q2 2023 that were purchased in cash include Detroit, Buffalo, Cleveland, Cincinnati and Indianapolis.

Some of these smaller metropolitan markets are surprising investors with healthy returns. Areas like Trenton New Jersey saw returns on investment increase by as much as 85% in the second quarter of 2023. Similarly, Montgomery Alabama increased from 30.8% to 78.8% in the same period.

Cash is King

As secondary markets like Cincinnati and Detroit become more attractive for their affordability, the markets that were previously first choice are being looked past due to their cost of entry. After three years of tight margins, fix and flip investors are feeling the squeeze and migrating to the markets in the South where their dollars go further.

Now the target is on states like Georgia and Florida: in fact, as of October 2023 Florida has overtaken New York as the second most valuable real estate market in the country behind California.

Real estate investors are pivoting to these Southern markets as they see opportunities to close the housing gap while also making the profits they need to continue investing. One way they are shifting is by focusing their efforts on high density homes rather than single families. For flippers as well as rental property investors, this strategy is bringing in more profit while addressing the challenge many home buyers are facing as mortgage rates continue to climb.

The strategy of increasing population density is operating heavily across the south, especially in the suburbs of Atlanta. Areas like Snellville, which are historically smaller communities with large estate properties, are seeing the population increase by nearly 1,000 new residents between 2022 and 2023 due to development projects. Investors are seeing opportunities in these areas to build town-home and multifamily neighborhoods to accommodate more people.

Conclusion 

As the landscape of real estate investing shifts, fix and flip investors need to pivot to keep the shop open. For many that means expanding their reach outside of the historically profitable regions like the Northeast and exploring the less dense and more affordable Southern markets.

While these secondary markets don’t tend to produce the greatest gross profits, they certainly surpass the primary markets in net profits. With the help of fix and flip loans, real estate investors can use less of their own capital and secure projects that would typically be outside of their price range. At Asset Based Lending, we offer hard money loans for fix and flips that allow investors to take advantage of current market conditions.