First-time home buyers struggle to find homes in decent neighborhoods that are move-in ready and affordable. Often there are homes available, but not at prices that most buyers applying for their first mortgage could possibly afford. New construction is not meeting this demand for starter-homes. Philadelphia house flippers are the last hope for first-time home buyers.
Philadelphia house flippers
Fix-and-flip real estate investors, “house flippers,” purchase distressed houses at deeply discounted prices. Leveraging their own capital, flippers typically secure financing from private lenders to carry out needed repairs on the houses and renovations that will force appreciation. The goal is often to make these houses rent-ready. Sometimes flippers rent them out, refinance and retain them. Sometimes they sell them to other buy-and-hold real estate investors. Rental demand has been high in Philadelphia so this strategy has been working well. Philadelphia house flippers don’t often rehab and sell to first-time home buyers, but they may not be aware of the housing market trend that is making this a lucrative option.
First-time home buyers in Philly
New construction of houses is not geared toward first-time home buyers. It hasn’t been for years. Most first-time home buyers in Philly are not looking to buy fixer-uppers that will require expensive repairs (nor will the banks approve mortgages for such houses). The demand for good starter homes is high but somewhat invisible as these want-to-be buyers continue to rent and save money for their first homes.
Why aren’t starter homes being built to meet this demand? Caitlin McCabe’s November 2018 Philadelphia Inquirer article explained that the number of new housing units being constructed has not fully recovered from the Great Recession. Growth in housing starts was sluggish in 2018 and it’s expected to be worse in 2019. All the costs that go into building new homes, like the cost of land, materials, labor and government expenses, have all gone up significantly. Now, because government expenses including inspections and taxes remain about the same whether you’re building a smaller or larger house, builders are opting to build higher priced homes to better recoup their costs. They’re building for buyers looking for more luxurious homes. McCabe explained, “that has further exacerbated the region’s — and nation’s — starter-home shortage, and has further kept first-time and low-income home buyers out of the market.”
The opportunity
The demand for starter homes is real and not being met. Philadelphia house flippers who can repair and renovate distressed houses and resell them at prices attractive to first-time home buyers will do very well. This may require doing more extensive renovation, rather than just rehabbing to the minimum required to make houses rentable. In many cases this just means more expensive finishes (like kitchen counter tops and flooring), a little more attention to interior design, and better appliances. But selling retail will mean a higher price point and potentially a greater return on investment.
Summary
Philadelphia house flippers willing to rehab for retail sale rather than renting out could make steady profits because the demand for starter homes in this city is great.