DALLAS — Mom-and-pop house flippers are a relatively confident and optimistic bunch at the start of the new year despite challenges including high mortgage rates and low housing inventory. Some single-family home rehabbers are shifting from a fix-and-sell strategy to a fix-and-rent approach because the higher mortgage rates are sidelining would-be buyers. And the inventory shortage is causing investors to turn to older homes to restore.
Those are the some of the key findings in a survey from Irving-based New Western, a marketplace for fix-and-flip residential properties.
The report, titled “The Flip Side: An Outlook for Residential Real Estate Investing in 2023,” found that 73% of investors surveyed said their business grew from 2021 to 2022, and 70% said they plan to invest in 2023.
In addition, 63% of investors who are interested in buying for the first time in 2023 said interest rates are not too high to keep them from purchasing homes, as 59% plan to use cash or private money.
The exit of iBuyers like Zillow and Redfin from the investor market will open more options for individual investors to scoop up homes to rehab, said Kurt Carlton, president and co-founder of New Western.
Small investors who leverage their local knowhow and nimble operations will have a home field advantage in 2023 when it comes to finding opportunities in their neighborhoods, Carlton added in an interview with the Dallas Business Journal.
The survey also showed a growing youth movement in residential real estate investment. Some 7% of investors who have bought investment properties previously are 18 to 29 years old, as are 15% of investors looking to purchase for the first time in 2023. And 86% of Gen Z respondents said they are ready to enter the market once mortgage rates show signs of stabilization.
“It’s a new generation, new ideas and a new way of looking at things that are outside of the typical 55- to 65-year-old real estate investor playbook,” Carlton said.
Carlton shared more observations regarding the new study, what it means in Dallas-Fort Worth, and how small investors can take advantage of the market to grow their fix-and-flip or rent business in the interview that follows:
What are the biggest opportunities in the DFW market right now for fix-and-rent investors?
We're seeing a lot of return to the fix-and-rent. It's a lot more balanced. Last year it was all fix-and-flip (sell). The demand is certainly increasing for rentals, obviously due to rates. Your investors have a much more mixed opportunity right now. If they can't flip it, they can rent it. They have more flexibility. And you see some areas where it was very frothy — some West Dallas neighborhoods and areas like that — where maybe a house was $400,000 and your only opportunity was to buy and fix up and flip it. Now, if you're able to pick up homes in those niche areas for $300,000, it qualifies for a rental. You've just had the buy box really open up for what will rent, even with high rates and everything.
What surprised you about the results of your latest survey?
What was interesting is we were expecting to have a really negative sentiment. We have 150,000 investors on the platform. We survey them regularly for our own purposes. And this was just interesting, so we decided to create some material outwardly based on the responses, and the majority of the investors that were purchasing last year are interested in carrying on into 2023.
What are the biggest opportunities and the biggest challenges in the market right now?
Finding inventory is always going to be a challenge even though it's gotten easier right now. Inventory has doubled in DFW since this time last year. But that's not saying much. We're still in a seller's market, that's for sure.
And the opportunities?
The biggest opportunity right now for individual real estate investors is that the institutions and the iBuyers have given the market back to the small guy. They’ve just given it right back. And even though we're still in a seller's market, they needed that little bit of loosening that that we've been given to have a more predictable outcome. You can actually find inventory now. You can actually rent inventory now. The pricing is favorable for that strategy in a lot submarkets now in DFW that just didn't exist before.
Why is that?
That’s primarily because people were so desperate for housing (before the downturn) that there wasn't a big gap in what someone would pay for a distressed house versus a quality house. Now the gap is much bigger. Those distressed houses sit around a little bit longer. There's a little bit more room to negotiate. Investors can get favorable pricing that allows them to execute the strategy, whether it be fix-and-flip or fix-and-rent.
What's your outlook for home prices for the year ahead, focusing on DFW?
It's obviously softened. If you look at DFW as a whole, we're probably going to end last year with between 6% and 10% home price appreciation for the year. We gave a lot back in the second half of the year. We were up pretty hard in the beginning of the year. Moving forward, it's going to be real nuanced, and that's where you bifurcate the investor market versus the traditional market. The investors kind of fit into the cracks in the market. Those are opportunities. Even though inventory has increased, demand has fallen off a cliff. You're quelling a lot of the supply from coming online because people aren't listing their homes. And the people who aren’t listing aren’t buying (another home).
But the investor market hasn’t really changed at all. People are still inheriting houses that are in need of repair and shouldn’t be listed on the MLS and need an investor. Life hasn't changed for distressed housing, so everything is still moving along. And if pricing is going to be up 5% or down 2% or whatever, the investors are able to have a big enough gap when they purchase that they fit that into their strategy. They’re able to risk adjust so they’re okay.
We’ve talked about pricing, mortgage rates, supply and demand, challenges and opportunities for house flippers. What else is going on in the housing market?
One thing that we’re seeing that’s interesting is, when we start to look at what's been built in DFW and around the country, a third of the homes ever built are entering this phase right now where they're 20 to 40 years old. That means they're starting to enter that point in their life cycle where they have their first major improvement project. Major systems — roof, plumbing, HVAC — all these things are going to become an issue for these houses. All these old Fox & Jacobs houses in The Colony that are built on these (aging) slabs, things like that. If you think of just DFW’s housing infrastructure, you’re getting to a phase where you’ve got a tidal wave of home rehab. We've got a big lump coming through that we're watching. We're expecting that to peak in 2027.
This interview was edited for brevity and clarity.