It Isn't Really Fix-And-Flip. It's Value-Add.
The fix and flip real estate sector really isn’t fix and flip anymore, it really is value-add at this point. What is the difference, and why does it matter?
‘Flipping’ was a term that came about in the heady days of real estate investing in the early 2000s. Home prices were rising so fast that speculators were buying homes with the intent of doing little to no work, but just ‘flipping’ it to the next guy. The housing bubble burst and put an end to that, and banks and other financial institutions ended up holding portfolios of these homes, which they did not want to hold. These properties were sold at discounted prices, which again opened an opportunity for speculators. The banks were highly motivated sellers, for a variety of reasons, which led to steep discounts on individual properties. Many of these properties had not been well-cared for and needed some light work to get back into move-in condition. Speculators bought these homes at the artificially low prices, did the light rehab, and sold them at a profit. Minimal fixing became part of the process, and the term was updated to ‘fix and flipping’. However these types of properties are now few and far between, and the more financially motivated and short-term players are far fewer in number.
The market has evolved. There certainly are still individual financial players, but now there are the institutions or ‘big guys’ such as Blackstone/Invitation Homes, Invesco/Mynd, and an ever-changing crew, building out rental portfolios for their own holdings or to be marketed as REITs. And they do make mistakes as well, such as Zillow’s ill-fated adventure, may they rest in peace. This group is really acquiring properties for the purposes of being a landlord.
In this ever evolving market there is another important group of players—the tradesmen, and in this case, the ‘little guys’ that have risen in number. This group resembles the prior ‘fix and flip’ players as they are indeed planning to fix the properties after holding for a short period of time, but their actions have a very different impact on the homes and neighborhoods they operate in. Previously, homes were being returned to baseline values in a buyer’s market; now homes are being updated in a seller’s market and true value is being created.
This situation is very similar to what happens in the commercial property market. The commercial property market has 2 main categories: core and value-add. The core market consists of high-quality properties with high-quality tenants in place, held by investors looking for highly predictable returns that cover a bit more than their costs of capital. Properties are acquired and held for long periods of time. In the SFR market, this is very similar to the current institutional players.
The other category in the commercial property market is the value-add sector. These properties need renovation or repositioning, and are frequently un-tenanted, or in need of new tenants. The risk is higher, and the plan to return the asset to service after renovations and addressing deferred maintenance, basically a ‘one-step-back-to-take-two-steps-forward’. This is very similar to the tradesmen currently involved in the market, so we believe it should be referred to as what it is: value-added.
This is an important distinction because of perceptions. No one likes to feel like someone else got a ‘better deal’, or that somehow, they were taken advantage of, and this is certainly not the case with a value-add project. Tradesmen purchase a home and do required work at prices cheaper than what an end purchaser could, which means the finished project is not only delivered in move-in condition, but also at a lower cost than if that end purchaser would have bought the house and paid for and lived through the renovations.
So, it really isn’t fix-and-flip, it’s value-add. Calling it what it is will help us all accurately portray the importance of what is being accomplished.