Offer sage advice to borrowers seeking to improve and resell a home
The COVID-19 pandemic has altered many aspects of life. A multitude of work-from-home jobs emerged when offices closed down. As these positions appear to be sticking around, some people are growing unsatisfied with their home and work environments. As a result, fix-and-flip investors (who purchase properties with the goal of quickly upgrading and reselling them for a profit) should adapt their remodeling strategies to fit these new lifestyle trends.
Keeping up to date on popular home-renovation trends is not only useful for owner-occupants who are looking to update their home offices or kitchens — it’s also essential for short-term investor success. It’s safe to say that U.S. home prices will continue to appreciate in 2022, with conservative year-over-year growth estimates in the 5% to 10% range, even as rising interest rates are likely to calm the buyer frenzy. Some sources forecast that more inventory will slowly enter the market, which may mean more prospective fix-and-flip projects available to borrowers.
There is no guarantee of a fix-and-flip surge, but mortgage originators should be aware of these market forecasts. Clients who are looking to be first-time investors may have an opportunity to buy a property through a traditional sales transaction rather than at a foreclosure auction, where professional fix-and-flippers have an advantage. This is beneficial for the originator and presents a new revenue opportunity as traditional refinances dry up due to rising rates.
No matter how many properties an investor has flipped or how many loans an originator has funded, it is important to know the role of the loan product in making these projects as efficient as possible. The more experience an investor has, the higher their loan-to-value (LTV) ratio can be. If an investor isn’t as experienced, an originator will need to talk to them about managing their rehabilitation costs so they can maintain a lower LTV and match up with the loan-qualification math.
In the current fix-and-flip market, knowing the desires of buyers is key, and it pays to stand out. Think about incorporating some of these ideas into your next conversation with one of these borrowers.
Heavier rehab projects often require more cash from the borrower because the lender is less likely to offer a higher LTV. For an investor whose livelihood hinges on turning a mediocre home into a stunning one, knowing what sells and what doesn’t can make or break a fix-and-flip investment. A few renovation trends in particular have helped home values to skyrocket over the past two years.
Originators should be aware of these trends when advising investor clients. Prior to the pandemic, minimalism was in. Simplicity was emphasized while abstract patterns and clutter were avoided. White-and-beige color schemes, plain furniture and limited decorations were ideal. Recently, however, more homebuyers are being attracted to maximalism. People spending more time at home want more color and visual interest in their spaces.
Gone are the monochromatic walls and rugs in every room. Renovators are using colorful rugs, paint, artwork and decor to create exciting and lively rooms. Experimenting with texture, color and pattern can easily personalize and refresh a room. One unique maximalist trend for a fix-and-flip investor to consider is patterned hardwood flooring. Rather than standard flooring that fades into the background, patterned flooring uses unique designs to draw the eye and serve as a room’s main attraction.
Viral home-renovation stories have helped to push this movement during the pandemic. Social media provides people with motivation and inspiration to revamp their way of living — and content creators are happy to help.
Take Kyla Herbes, whose TikTok account (@houseofhipsters) grew heavily in May 2020 because of her interior design content. Her videos focus primarily on innovative decorations and designs for single rooms, as seen in her “One Room Challenge” series. In one example of content, Herbes combined expensive, eclectic wallpaper with cheap curtains and an antique tassel lamp. She enjoys mixing modern styles with vintage items in a maximalist aesthetic, as seen in her bathroom that features animal-print wallpaper and an expensive chandelier.
Many investors, however, become overwhelmed with the possibilities and don’t know where to start with their renovation and redecoration plans. Often, they simply repeat the minimalist themes of pre-pandemic days. Fix-and-flippers would likely benefit from repurposing parts of their project to help attract a new buyer.
When mortgage originators advise their clients about which types of remodeling projects to take on, they should focus on the main features of a home that appeal to buyers. Updating an existing feature can create a new feeling in a home without having to spend too much on materials or cluttering up the space. Many properties require significant amounts of work to look appealing to a buyer, so incorporating lower-cost elements can help to get the job done without breaking the bank. Do-it-yourself projects, rather than hiring a licensed contractor, can accomplish the same task.
Being able to renovate in an inexpensive yet trendy way helps the investor to close the transaction profitably and makes the new buyer satisfied that they are receiving an updated property. Spending less money to create a more appealing space is an invigorating cycle for fix-and-flip investors. Those who continue this cycle with other properties will surely find great success and additional profits in their projects.
Kitchen expansions are some of the more popular renovation trends of late. Being stuck indoors has led people to spend more time in their kitchens and has caused many to realize that their kitchens are lacking some functionality. Additionally, with everyone at home, the kitchen can become a busy place, so making this room crowd-friendly is increasingly common.
Sometimes, a fix-and-flip borrower will remodel a kitchen but doesn’t think about enlarging it, taking out an adjacent wall or putting in a breakfast bar. These details don’t cost a lot of money in the overall budget when new cabinets, appliances and granite countertops are already factored in. A large, open kitchen offers versatility of use as a dining room, gathering space, classroom and much more, depending on the needs of the family. It can easily increase the value of any home flip. This is a great example of advice that mortgage brokers should give fix-and-flip borrowers when discussing renovations that will ultimately appeal to a buyer.
While some people were drawn to the kitchen during the pandemic, others were called to the great outdoors. Outdoor living spaces are good places to eat and socialize with loved ones. One major trend among contractors has been the construction of front or side patios to add functionality and a level of external attractiveness to a home. Similarly, adding an enclosed patio can be appealing for those who live in an area with all four seasons.
Revamping an outdoor space can become a hugely creative project and some home flippers have gone all out to incorporate a feeling of luxury in these spaces. Luxurious outdoor kitchens with grills and countertops have soared in popularity of late. Why stop at one beautiful kitchen inside the house when you could have another one outdoors? If it’s cost effective for the loan program in question, it can be a great addition to any fix-and-flip project.
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In the current fix-and-flip market, knowing the desires of buyers is key, and it pays to stand out. Think about incorporating some of these ideas into your next conversation with one of these borrowers. It will add more value than just finding the right investment-property loan for them.
Experienced borrowers often have an opportunity to receive a higher LTV on their project, which allows them to leverage other people’s money and increase their returns on investment. By educating themselves on the fix-and-flip lending industry, mortgage originators add value to a transaction because they are cognizant of how these loan programs can benefit borrowers.