BAM Key Details:
- A new Redfin report finds real estate investors lost money on about one of every seven (13.5%) U.S. homes they sold in March—close to February’s 14.5%, the worst rate of loss since 2016—largely due to high mortgage rates dampening buyer demand.
- For context, 4.8% of overall U.S. home sales that closed in March sold for less than the seller originally paid for it.
A new Redfin report shows real estate investors losing money on close to one of every seven (13.5%) U.S. homes they sold in March—which is close to February’s 14.5% loss, the largest since 2016.
For context, 4.8% of overall home sales that closed in the same month sold for less than the seller’s original purchase price.
Those numbers come from Redfin’s analysis of county records and MLS data across 40 major U.S. metro areas.
The working definition of “investor” here is any business or institution that buys residential real estate, from mom-and-pop operations to large companies. And while most of these investors still managed to reap gains on their properties, those gains have gotten smaller.
The typical real estate investor who sold a property in March sold it for 45.9% ($145,714) above the price they originally paid. That’s down from 55.3% (173,458) a year ago and well below the pandemic peak of 67.9% (199,274) in June 2022.
Home flipping investors aren’t getting the margins they used to with property sales, especially with homes priced above the median—and in certain U.S. markets.
Home flippers and renters see diminishing returns
About one in five (20.8%) of U.S. homes sold by flippers in March sold for less than the home flipper paid for it—higher than the overall loss rate of 13.5% for investors.
Redfin defines “flippers” as investors that buy homes and resell them within nine months.
Investors who rent out their U.S. properties are also seeing a drop in their returns as the median asking rent declined 0.4% year over year in March—the first annual decline in three years. Thirteen major U.S. metros saw bigger drops.
Investor-owners of short-term rental properties are also feeling the pinch, thanks to the overabundance of Airbnb rentals and the increase in cities imposing tighter restrictions on short-term rentals, which is driving more of these owners to sell.
You might wonder why investors don’t just wait to sell until the housing market bounces back. Many long-term investors who rent their properties out are doing that, but many flippers—especially those who bought recently—can’t afford to. 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. 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.
During the pandemic, record-low mortgage rates and crazy-high buyer demand encouraged investors to step up their purchases. But, in the fourth quarter of 2022, as Redfin reported in February, investor purchases dropped year over year by a record 46%,
Investors are more likely to lose money on home sales in Phoenix and Las Vegas
In March, 30.7% of investor home sales in Phoenix came with a loss for the investor—the highest loss rate of all the 40 metros in Redfin’s analysis and more than twice the national rate.
Top five metros with the highest share of investor home sales with losses:
- Phoenix (30.7%)
- Las Vegas (28%)
- Jacksonville, FL (20.9%)
- Sacramento, CA (20.2%)
- Charlotte, NC (17.4%)
Investors were most likely to lose money in markets where home purchases skyrocketed during the pandemic—many of which are now cooling the fastest.
Pandemic boomtowns and pricey coastal metros are now seeing drops in both home prices and sales as housing costs and high mortgage rates price out many buyers. Smaller investors are more likely to feel the impact as they’re often the first to start offloading their properties. Larger investment companies can more easily afford to wait for market conditions to improve.
Most of the investors I see selling now are mom-and pop-investors. They’re selling because their long-term tenants are moving out, they want to put their money elsewhere, or they just want to get out because they have heartburn from 2008. The best time to sell would’ve been late 2021 or early 2022, but many of them are thinking that the next best time is now because the economy and home prices could slow further.
While a fair number of large real estate investors are sitting tight with their properties, iBuyers are bucking that trend, eager to offload inventory. That could partly explain why some markets with a relatively large iBuyer presence—like Phoenix, Charlotte, and Las Vegas—have seen an increase in the share of investor-owned properties selling at a loss.
Redfin, for its part, shut down its iBuying operation, RedfinNow, last November.
My colleague recently represented a couple that purchased an iBuyer home for $610,000, substantially below the $760,000 list price and the $708,200 price that the iBuyer paid for the home,” Stein said. “The appraisal also came in at $680,000, so the buyers walked away with $70,000 in equity. The house sat on the market for 166 days before selling.
On the flipside, real estate investors are less likely to sell homes at a loss in relatively affordable areas and some South Florida markets.
Virginia Beach is one example, with only 1.7% of investor homes selling at a loss in March, followed by three Florida metros and one in Michigan.
Top five metros with the lowest share of investor home sales with losses:
- Virginia Beach, VA (1.7%)
- West Palm Beach, FL (2.4%)
- Miami (2.5%)
- Fort Lauderdale, FL (2.5%)
- Warren, MI (2.6%)
Affordable housing markets have seen sustained buyer demand because home prices didn’t climb as quickly or as high during the pandemic. And higher mortgage rates make less of a difference in monthly payments in these markets compared to more expensive ones.
Investor home sale prices are less than a year ago
The median sale price for investor homes that sold in March was $463,505—down 4.8% year over year from $486,980. San Francisco saw the biggest annual decline among all the metros in Redfin’s analysis, as the median sale price of investor homes dropped by 30% year over year.
The top five metros with the biggest annual drops in median sale prices:
- San Francisco (-30%)
- Sacramento (-13.6%)
- San Jose, CA (-13.4%)
- Oakland, CA (-13.3%)
- Warren (-11%)
Rounding out the top ten were New York, Phoenix, Las Vegas, Seattle and Denver.
Overall, home prices across the U.S. have fallen most dramatically in pandemic boomtowns and pricey coastal metros because prices in those markets soared during the pandemic and are now dropping from unsustainable levels.
With losses mounting, some investors are taking bigger risks to decrease their upfront costs.
Some investors are offering sellers a 60% down payment but hedging their bets by holding onto the rest until they flip the home and resell it. Let’s say an investor bought your home for $700,000. They would give you $420,000 upfront and then write you another check once they cash out, but the risk is that oftentimes, they’re not guaranteeing that you’ll get the full remainder of your money. If their flip doesn’t go well, they might only give you $150,000 of the $280,000 they owe you.
As a rule, Redfin agents do not recommend that sellers jump on offers like this, especially if they’re being asked to eat whatever loss the investor takes in the resale. One potential benefit, of course, is the big lump sum upfront, which the seller can put toward their next home.
Depending on how desperate the seller is for quick cash, the lure of that benefit could override the fear of losing the remainder of their home’s sale price.
Investors own 10% of U.S. homes for sale—up from pre-pandemic levels
As of December 2022, investors own 10.1% of for-sale homes on the U.S. market—down from 12.4% a year ago but well over pre-pandemic levels.
The larger share of for-sale homes owned by real estate investors is further evidence that more of them are inclined to sell off their inventory and cut their losses—in case there’s no improvement in market conditions for sellers in the months ahead.
Top takeaways for real estate agents
Investors looking to sell in your market could benefit from an agent who can read the market and anticipate, better than most, how conditions for sellers will develop in the coming months.
Investors looking to buy homes could also benefit from an industry professional who knows what properties in their market are more likely to sell for more than the purchase price six to nine months out—based on recent stats for area homes by location and price point.
Likewise, buyers and sellers who might be inclined to transact with investors would benefit from any insights you might have gained by helping them. And the further rental returns decline, the more likely those investors are to sell. Keep an ear to the ground for any information that could help any of these potential clients, so you can steer them in a direction that benefits them.