Fix-and-flip buyers see more opportunities in 2023

Although a challenging real estate market looks set to persist for much of 2023, a majority of noninstitutional investors view the current market offering opportunity and plan to grow their businesses in the coming year, a new study found.

Approximately 70% of single-family home investors said they expect to make additional purchases this year, based on surveys of close to 900 current and potential clients conducted by New Western, the real estate marketplace platform connecting independent fix-and-flip investors to sellers. The number represents a small decrease from the 73% who said business grew from 2021 to 2022. Among likely buyers, 59% intended to use cash or private money for their purchases.

The growth during the past year among many investors occurred as interest rates more than doubled over the previous 12 months, with the benchmark 30-year rate surpassing 7% for a brief period in the fall. While rates remain elevated to start the year, their current levels seem to leave new players in the market undeterred, New Western found, with 63% of respondents who were considering investment purchases for the first time saying interest rates were not too high.

The pullback in purchases and exit from the market of large institutional buyers likely contributed to a somewhat positive outlook for many.

"The demand is there, but inventory nationwide is still very low. We know there will not be enough new builds to close the gap, while the exit of iBuyers from the investor market will open up a surplus of options for individual investors to scoop up deals and provide inventory by rehabbing existing homes," New Western Co-founder and President Kurt Carlton said in a press release. 

"Even though rising interest rates present a challenge, the reality is we have a deficit of five million families that need homes," he said. 

This year's overall housing outlook signals a reversal of trends from 2021 when interest rates were low and properties were often immediately purchased, frequently by institutional buyers, leaving both smaller investor businesses as well as potential homeowners on the outside looking in. 

Mom-and-pop investors, particularly, might benefit with their knowledge of their local markets to target underserved borrowers this year, the report suggested. Median prices of homes bought by investors came in 31% lower compared to the overall retail market value in some of the hottest markets in 2021 and 2022, including Austin, Texas, and Phoenix, when New Western and Redfin were analyzed side by side. 

General cooling housing trends carried over to the investment sector as well in such boom markets over the past few years, opening up the potential for further acquisitions. But continued affordability constraints facing aspiring homeowners may also cap resale values, meaning a pivot in investors' strategy might yield more profit, New Western predicted. 

"As rent becomes more affordable than mortgages, the opportunity arises for investors who have chosen to lean into a fix-and-rent strategy in 2023," the report said.

Investors under the age of 30 are also emerging as a more influential segment in fix-and-flip ranks. Among participants already in the market, 7% are currently between the ages of 18 and 29. But for 2023, 15% of likely first-time investors were in the same age range. The most popular markets targeted by the age group were more frequently college and university towns, such as Columbus, Ohio; Missoula, Montana; or Madison, Wisconsin, according to New Western.

Two Oklahoma markets were among cities appearing to offer the greatest promise in the eyes of the overall investing community, with both Oklahoma City and Tulsa recording increases of over 51% in properties sold year over year to investors through New Western's platform. On the other hand, Redfin reported drops in retail sales of 3.6% and 8.4% in the same markets.