MARKET SPOTLIGHT: Phoenix Basking in the Desert Sun Once Again
petition from institutional investors along with internet buyers (so-called “I buyers”) through websites such as Opendoor, Offerpad and Zillow, has him diversifying his business model. “Our strategy is to find our own deals. A lot of guys were eating well when they could go out and buy foreclosures. That’s all dried up,” said Manley. “Most investors are buying from wholesalers. The thing is that we buy with enough margin that we feel pretty good about it. We’re steering away from those long rehabs.” ATTOM reported that all-cash sales in the Phoenix metro area grew by 25 percent in 2018, while the number of home sales to insti- tutional investors increased by 47 percent last year. Even so, the number of flipped homes in the Phoenix metro area accounted for 9.1 percent of all home sales in the metro area last year, up 7.4 percent from the previous year although down 19.8 percent from five years ago and down 52.4 percent from its 2005 peak, according to ATTOM. In all, 55.9 percent of all flips in Phoenix last year were purchased with cash and 44.1 percent were financed. The median purchase price was $201,000 with a flipped price of $240,000. Investors made a gross return on investment of 19.4 percent last year, down from the 28.8 percent gross ROI they earned in 2017, a 33 percent decline. “The non-institutional, non-corpo- rate investor is having a much tough- er time. The individuals purchasing fix-and-flips are having a tough time finding properties to renovate and sell because they are having a hard time finding properties they can afford to purchase and make a profit on. The margins have gotten squeezed,” Stapp said.
PHOENIX MSA YEAR-END MEDIAN SALES PRICES
$300,000
$252,500
$249,850
$250,000
$250,000
$231,000
$218,000
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$194,500
$200,000
$185,000
$174,184
$150,000
$137,991
$125,000
$125,000
$110,000
$100,000
$50,000
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ily. For buy-and-hold, there’s a lot of low-density multi-family in the Phoenix market. You can still find good cap rates. We’re still seeing 8 percent on C and D properties, which is really good. Section 8 properties are paying more than market rent and getting a decent cap rate,” said Richardson, who indicated that in- vestors don’t have to go out into the periphery to find decent multi-family investment properties. “Good deals can still be found in the city’s inner core,” she said.
investors and private equity firms has made it harder for small individ- ual investors to find deals. In these market conditions, the key to identifying properties that will provide cash flow for investors comes down to networking. “Small investors are still here, just not at the scale that the in- stitutional investors and equity firms are buying at,” said Sarah C. Richardson, designated broker and principal at Tru Realty in Scottsdale, herself a wholesaler. “Most of the wholesalers are deal- ing with fix-and-flippers, not buy- and-hold investors. We need to get the buy-and-hold investors on the list to get these off-market proper- ties. If you’re really dialed in to some of these wholesalers, there’s still cap rates to achieve,” she said. For investor Brian Manley, princi- pal and co-founder of The Property Cartwheel Group, the tight inventory of existing homes, a somewhat soft- ening market and increased com-
Despite the tougher market condi- tions, Manley said he and his partner are making a good living. The secret is to be smart about the buying side of the deal. Both of them have an extensive background in data, so they are not afraid to do the deep data dives it takes to locate potential properties to flip. “It was a lot easier two or three years ago,” Manley said. “If you’re coming out here to invest, I would only look at short term flips. There’s danger in the longer flips.” He continued, “Our end game is to buy, rehab and sell, or to whole- sale it. There’s always a market for wholesale deals,” Manley explained. “A house that needs extensive rehab may keep us from buying it. We don’t want to get caught holding anything as the market softens.” When it comes to buying and hold- ing rental properties, Richardson suggested avoiding the single family market altogether. “The play right now is multi-fam-
Stapp noted that lifestyle decisions are creating demand for housing from both Millenials and seniors who are looking to downsize. Unfortu- nately, neither of these groups wants to live in the periphery. “They don’t want to give up on walkable places and access to amenities. One of the things we see happening is the ur- banization of our suburbs,” he said. According to his report, Stapp es- timates that demand for new hous- ing units in Phoenix totals roughly 28,000 units per year with 8,000 to 9,000 of those being multifamily and about 20,000 being single-fam- ily homes. For 2019, however, he estimates the total number of combined residential permits to total 33,324, with single-family permits accounting for the bulk of the increase. “We have a very low inventory of existing homes. Somewhere around four months. If you’re looking for homes in the median price range – $300,000 and below –
there’s almost nothing on the mar- ketplace. That’s where our problem is,” Stapp explained. One possible solution to address the affordability issue in Phoenix is through what Stapp calls “new build rental communities.” Basically detached homes built with the intent to rent. “This is emerging from the foreclosure purchase rental trend. There’s a lot of capital being placed into this housing type.” Additionally, he noted that a lot of money is being poured into the purchase of mobile homes and mobile home parks by large insti- tutional investors to hold onto as income-producing assets. STILL AVIABLE MARKETPLACE The Phoenix market still holds opportunity for both fix-and-flip and buy-and-hold investors. However, the combination of low inventory and massive purchases by institutional
Joel Cone is a freelance business writer based in Southern Califor- nia. His articles have appeared in
California Real Estate magazine, Real Estate Southern California, OC Metro, GlobeSt.com, Foreclosure News Report, the Los Angeles Daily Journal and the Smarter Investor blog for U.S. News & World Report, as well as many other print and online publications. Contact him at snocone1030@gmail.com.
30 think realty housing news report
may 2019 31
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