Real Estate Flippers Sink or Swim in unchartered waters during pandemic

Real Estate Flippers Sink or Swim in unchartered waters during pandemic

Melanie Pursglove Marsh is under contract to buy a four-bedroom house in Crafton. It will be the 10th investment property she has fixed up and resold since quitting her sales job in Chicago five years ago and moving back to Pittsburgh to be near family — and to be part of the gold rush that made the Steel City a hot market for real estate flippers.

She hasn’t changed her mind about buying the Crafton house. But she has asked her lender to postpone the closing until the end of April. That way she hopes to avoid sitting around with a house that her contractors can’t work on while she is obligated to pay the mortgage.

“Not knowing when this economic shutdown will be lifted makes it hard to plan for the future,” said Ms. Marsh, 35, of Cranberry.

She worries that the house may not sell for the $300,000 to $325,000 price she’s expecting if values fall after the COVID-19 crisis ends.

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Real estate investors who have made good money so far betting on Pittsburgh’s booming housing market have seen their world turned upside down. Flippers, in particular, are always under pressure to finish projects quickly due to the way short-term real estate loans are structured.

The most common type of fix and flip loan is a hard money loan, which is also called a rehab loan. Investors will use hard money loans to purchase, renovate and sell a property within one year. The fees can be as much as 2.5% of the loan amount and interest rates can be as high as 15%.

Many flippers are caught in a predicament — paying double-digit interest on money they borrowed from private lenders and the clock is ticking, while the state-mandated shutdown drags on.

“I have one house on the market that I can’t show, and another project in Coraopolis that’s almost finished, but already has a buyer who saw it a couple of days before the shutdown,” said Brian Snyder, an Ingomar-based real estate investor. “I have another one in Shaler and one in Stanton Heights that got stopped when the shutdown happened.

“In all of those cases, I’m paying 10% interest,” Mr. Snyder said. “If you count insurance, taxes and interest on the money, it’s costing me $100 to $150 a day perhaps just to own the properties and all of those things are still needing paid.”

A mecca for flippers

House flipping has always been a risky endeavor, if for no other reason than the substantial amount of money needed to purchase, rehab and hold a property until someone buys it for a higher price.

But Pittsburgh made national headlines in recent years for being the most profitable major metropolitan area in the U.S. for flippers.

ATTOM Data Solutions, a real estate information company based in Irvine Calif., found in a December 2019 report that Pittsburgh was the No. 1 most profitable place in America to fix up homes and sell them for a profit. Pittsburgh home flippers made higher profit margins than real estate flippers in any other metro area in the country — 132.6%.

How flippers adapt to the uncertainties ahead could provide traditional home buyers and sellers with a glimpse of what might be in store for the broader residential real estate market.

In recent years, Pittsburgh’s housing market has been blessed with more buyers than sellers, which is why bidding wars are so common for homes that come up for sale in desirable communities. The general fear among real estate investors is that if this region is left struggling with record high unemployment and fewer people are able to buy houses the tables could turn.

“Pittsburgh has had a good run,” said Joe Calloway, owner of the Allentown-based real estate company RE360. “The common saying of the last bubble is that ‘Pittsburgh is always a steady market, so we will not get hit with a fallout in a bust.’ I still hear this from investors in 2019-2020.

“But if they did not think Pittsburgh had a run-up over the last five years, then you were not paying attention to Oakland, East Liberty, Bloomfield, Lawrenceville, Downtown and housing in general.”

‘Paycheck to paycheck’

The optimistic view is that home prices will get frozen in place, and once the public health crisis is over, the market will restart where it left off. 

Pittsburgh real estate values didn’t change dramatically during the financial crisis of 2008, said Josh Caldwell, president of the Pittsburgh Real Estate Investors Association. He believes values should remain stable for the same reason when the region emerges from this disaster — its slow and steady appreciation rate.

“That’s the reason I stayed away from Lawrenceville,” Mr. Caldwell said. “Those Lawrenceville investors are the ones most likely to pull the short stick if things go bad.”

But real estate flippers across Allegheny County who had to stop work in the middle of projects also have good reasons to be worried.

Aaron Chaney, co-owner of Penn Pioneer in Trafford, a real estate company that flips houses and manages 150 properties across the county, said shortly before Gov. Tom Wolf’s shutdown order, that he paid a $5,000 deposit to a contractor for a $15,000 job to install new ductwork in a property he is renovating.

He fears the contractor is using the $5,000 to feed his family right now. Mr. Chaney worries he will end up either paying the deposit twice — which bring his total cost to $20,000 for the job — or he would have to consider filing a lawsuit to try to get the $5,000 back. 

“Most contractors live paycheck to paycheck,” Mr. Chaney said. 

“If you gave a contractor one-third of the payment for any job before the shutdown, there won’t be any money left after the shutdown. If you can’t work something out with them, you will need to go to another contractor and start from scratch.”

With his current projects in frozen mode, Mr. Snyder said the shutdown is having ripple effects on future projects too.

“My capital doesn’t come from banks, but from private individuals that thankfully didn’t have it in the stock market,” he said. “I borrow and return their money twice a year with interest. What this shutdown means is I may only borrow and return their money once this year.

“I know a few people who are thankful they liquidated their 401(k) and loaned the money to me,” Mr. Snyder said. “Their money is safe. But it’s going to be costly for me.”

Tim Grant: tgrant@post-gazette.com

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