The glory days of real estate investors buying and flipping homes for quick profits seem to have hit a roadblock. It appears that investors are now losing on approximately one out of every seven homes they sell.
In certain U.S. cities, sky-high house prices and elevated mortgage rates have diminished homebuyer demand, forcing investors to sell homes at a loss. A recent report by Redfin reveals that in March, investors lost money on roughly 13.5% of the homes they sold, while only 4.8% of overall U.S. homes sold at a loss.
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February Real Estate Numbers
This comes after a dire month in February, where real estate investors experienced losses on 14.5% of homes sold — the highest rate since 2016 and a far cry from the record monthly low of 2.8% in May 2022. The first quarter of 2023 saw real estate investors purchasing 48.6% fewer homes compared to the previous year as elevated interest rates, declining rents and housing values ate into potential profits.
The decline marks the largest annual drop on record, outpacing the 40.7% decrease in overall home purchases in the major metros Redfin tracks. While these statistics dispel the notion that buying and selling real estate guarantees substantial profits, it's worth noting that investors still enjoy a relatively strong position overall.
Now, the question arises: Where are homes most likely to sell at a loss? According to Redfin, real estate investors are most likely to incur losses in markets that experienced the largest surges in house prices during the pandemic. To determine this, the report examined data from 40 of the most populous U.S. metropolitan areas.
Profitability has been hampered by high mortgage rates, which have increased the monthly payment burden for typical homebuyers. Consequently, the slowdown in homebuying demand has led to reduced sale prices, resulting in a higher share of investor-owned homes being sold at a loss.
Hardest Hit Markets
At the time of the report, the hardest-hit market was Phoenix, where just over 30% of homes sold by investors incurred losses. Following closely were Las Vegas, 28%; Jacksonville, Florida, 20.9%; Sacramento, California, 20.2%; and Charlotte, North Carolina, 17.4%.
Van Welborn, a Redfin agent in Phoenix, shared an example. "I recently showed one of my buyers a three-bedroom, single-family home in Glendale that was listed by an investor. My client ultimately found another house they liked better, and the investor ended up losing about $20,000. The investor bought the home for $450,000 and sold it for $480,000 but put $50,000 of work into it. The house also sold below the $550,000 list price after sitting on the market for almost four months.”
On the flip side, investors are less likely to face losses in affordable areas where housing prices did not experience such drastic increases during the pandemic. Certain South Florida markets have shown more resilience.
For instance, in March, only 1.7% of homes sold by investors in Virginia Beach, Virginia, resulted in losses — a significant difference compared to Phoenix. Following Virginia Beach were West Palm Beach, Florida, 2.4%; Miami, 2.5%; Fort Lauderdale, Florida, 2.5%; and Warren, Michigan, 2.6%.
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Why don’t investors wait to sell until the housing market bounces back? According to Redfin Senior Economist Sheharyar Bokhari, many long-term investors who rent out their properties are doing just that. But for many flippers, especially those who made recent purchases, waiting it out is not financially feasible.
In March, approximately 1 in 5 homes sold by home flippers resulted in losses, according to Redfin.
"Holding onto homes that aren't producing income can be expensive because the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases," Bokhari said. "Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses."
While the number of investor-owned homes selling at a loss is currently high, it is important to remember that many real estate investors — both large companies and individual investors — continue to achieve gains from buying and selling homes, even in cooling housing markets.
According to Redfin data, the typical investor sold a home in March for 45.9% ($145,714) more than the purchase price. But these gains have diminished from 55.3% ($173,458) the previous year and a peak of 67.9% ($199,274) in June 2022.
Amid concerns of a further slowdown in the economy and home prices, which could present more challenges for residential real estate investors, alternative avenues to participate in the real estate market are worth exploring. If buying and selling homes is currently off the table, consider alternative approaches.
Vacation Rentals
Some real estate experts believe that vacation rentals offer the fastest way to make money in today's real estate market. In 2023, as Americans opt for longer and more luxurious vacations, investing in vacation rentals makes sense when considering all the factors. And the best part? Anyone can get started with just $100.
Jurny, the first artificial intelligence (AI)-enabled hospitality platform, is revolutionizing the short-term rental industry. It reported a staggering 100% increase in daily active users since the launch of JurnyOS 2.0 last month. This cutting-edge operating system, powered by GPT-4 and featuring dynamic AI tools, takes care of all the heavy lifting for property managers. From streamlining operations to enhancing guest experiences, Jurny's all-in-one solution optimizes and automates every aspect of managing short-term rental properties worldwide. Anyone can invest in Jurny for a limited time.
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