Home pinball machines look for ‘creative deals’ as market cools

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Fix-and-flip investors have been forced to adjust their strategies in the face of a market rapidly sliding toward contraction, according to a new survey shared with Inman.

Investors say they still face stiff competition for pre-flip homes. But once they’ve bought those homes, their resale expectations are increasingly bleak, according to a new survey from John Burns Real Estate Consulting and interviews with investors.

With high interest rates, historically low but rising inventory and a shrinking pool of buyers, fix-and-flip investors face pain along with the rest of the housing market, with many now expecting to be in a “frozen market” for the next six months.

“I’ve taken a big hit the last few months,” said Peter Ledger, a fix-and-flip investor in Utah. “I have a house that I lose six figures on.”

As with much of the industry, the days of easy money and huge profits are largely over, and investors need to assess their next moves.

“The last two years people could fix and return and make a ton of money,” said Jordan Fulmeran investor in Huntsville, Alabama, with Momentum Property Solutions.

“Market-wise, that has definitely changed,” Fullmer said. “When it comes to smart investing, you just have to adapt and change your strategies.”

John Burns conducts a quarterly survey of hundreds of fix-and-flip investors across the country. It completed its third-quarter survey in mid-October, meaning the results reflect pinball sentiment after the rapidly changing and slowing market.

He said the pain was widespread, with more than half of those surveyed saying homes are mostly selling for less than three months ago.

“Sales have slowed significantly as high rates have reduced the pool of buyers for reverse homes,” said Alex Thomas, principal research analyst at John Burns Real Estate Consulting.

The survey measures sentiment and reports it on a Fix and Flip market index. A reading of 100 is a very strong market. A reading of 50 or less means the market is contracting. The index fell from 83 in the first quarter of the year to 53 in the third.

The buyer pool remains small due to high prices and high borrowing rates, and sellers have largely avoided selling cheaply, the report said.

What that means on the pitch is that the margin for error has been reduced, Ledger said.

Ledger bought a house in suburban Salt Lake without seeing it during the scorching market, only later discovering its short basement. When inventory was scarce and competition was intense, Ledger might have been able to flip the house and sell it for a good profit.

Before the change, “you could make a thousand mistakes and still make money,” Ledger said. “This is not normal in most markets. You make a mistake and you lose money. We’re where you make one or two unfortunate mistakes and you’re in the red.

Find creative offers

The survey found flippers now expect the market to contract following a rapid slowdown in prices, tough financing and a higher inventory of homes among which potential buyers can Choose.

Pinball machines are now offering less for homes, renovating homes with the intention of renting them out rather than selling them, or sitting in the market completely, according to the survey.

“We’ve had a few comments from pinball machines saying, ‘Now is not the time to sell, I’m going to buy, hold and lease,'” Thomas said.

Ledger and Fullmer are considering strategy changes rather than staying out of the market altogether.

The two told Inman they had what is commonly called a novation agreement with the owners.

It is a type of risk aversion strategy that does not involve the pinball machine buying the house outright and assuming all the risk. Some target long-time homeowners who may have significant equity and create a profit-sharing arrangement once the home sells.

“We’re basically partnering with the owner to fix it and sell it,” Fullmer said. “In that way, it’s a bit of a different strategy compared to the traditional cash purchase. It makes more sense in this type of market.

It seems the time has come to avoid risks, according to the survey. Seventeen percent of flippers said sale prices for flipped homes had fallen more than 10% in the past three months. Only 7% said home sales prices had increased.

“For me, in particular, I don’t buy flips anymore unless it’s through creative buying,” Ledger said.

Email Taylor Anderson

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