House flipping is doing what seemed impossible. It is creating new homes in the hottest areas of cities such as Madrid or Barcelona and recycling apartments that, given their condition or circumstances, had been commercially evicted. House flipping is creating apartments with attractive designs that promise returns of between 15% and 20% to investors, besides profitable sales to homeowners.
On May 21, the investment crowdfunding platform Fellow Funders published an investment in a small housing development on Calle Lérida in the Cuzco-Castillejos area of Madrid in partnership with the integral refurbishment company Re-Aviva. At first, the company claimed a return of 17% in 10 months. However, 23% of the 840,000 euros was covered in the first 24 hours of the transaction.
What is house flipping?
“We convert commercial and industrial properties into housing and conduct housing developments in small-sized plots but excellent locations,” explains Ildefonso Muelas, founding partner and head of Business Development of Re-Aviva, a company born in 2019 to specialize in such operations.
The Madrid-based Viflip is also developing house flipping. This company, which has been operating in Madrid for a year, is co-founded by César Reguero and offers an alternative to traditional real estate. “We help homeowners to achieve their sales goals, even for more money than expected, and buyers to get the house of their dreams,” Reguero says.
Viflip focuses on restoring the value of properties that are significantly deteriorated or have some other commercial handicap/legal problem that hinders their sale or detracts from their value. The company has sold ten properties at an average price of between 300,000 and 700,000 euros, besides seven more in the pipeline, waiting to start operations in Barcelona in the next few months.
To conclude and to understand the concept of real estate flipping, we should refer to the orthodoxy of the term, born in the U.S. market. The American Wikipedia defines it as “the process of buying, rehabilitating and selling properties in search of an economic benefit.”. There were more than 207,000 operations of this type in the United States in 2017. Its essence is summarized in buying cheap to selling more expensive, thanks to the added value offered by the reform.
How does house flipping work?
Ildefonso Muelas believes that for an operation to work, “the price of the final product has to be slightly below the average market price”. This incentive was 15% in the Delicias operation.
Except in tailor-made projects, Re-Aviva offers homes between 40 and 60 square meters at a price of no more than 250,000 euros in prime areas and some 200,000 euros in non-prime central locations. “It should not be forgotten that we are working on the first floor, so we are very aware that it has to be very attractive in its design and also offer high ceilings, lots of light, interior garden courtyards, etc.”. The company assures that to move forward with the first five developments, 80 possible operations have been analyzed, “There is a lot of work behind it.”.
Viflip’s model is to enter homes at a price between 15% and 30% below the area average and only in prime or very central locations. Their agreement with the owner includes assuming the cost of the renovation. When it reaches 50% of its execution, the commercialization begins, offering the buyer the added value to finish the renovation according to their tastes. Finally, the property should be marketed between 6% and 10% lower.
Both companies reiterate that the essential key to real estate flipping is the quality and design of the renovation.
What does it offer investors?
Many of the properties that have been reactivated by house flipping are acquired by investors for regular or vacation rentals. Investors are attracted to the profitability of a market with guarantees, even though it cycles up and down. Let’s look at an example.
As noted, Fellow Funders is an investment crowdfunding that, since 2017, has been very focused on the startup ecosystem. However, for the last eight months, it has introduced a real estate division led by Pablo Barriopedro. This startup has found in-house flipping a good opportunity.
The Delicias transaction raised 869,000 of the 1.17 million project budget. The participants were of two profiles: non-accredited investors (the law prohibits investing more than 3,000 euros in a single project), with an average ticket size of 1,000 to 2,000 euros, and accredited investors, who were not allowed to invest more than 50,000 euros in a single project. For both, the announced profitability is 22% in one year.
However, “House flipping is only going to work when the project is based on a good analysis and has excellent professionals.”, warns Barriopedro.
César Escobar, co-director of Valuation Control of the appraisal company Tinsa, also reflects on its attractiveness as an investment. “It can be interesting because, thanks to being below-average quality products, the acquisition prices are low with strong negotiations, and high returns can be achieved with the final product.”.
Having made the general assessment, Escobar warns that all properties must be studied independently. In fact, from a recent transaction in Madrid, he assures that the apartments “have been on the market for several months, and in the area, the sales rates are high for medium and good products.”.
How does it fit into the market?
Several factors seem to be driving this trend. From the perspective of Fellow Funders’ Real Estate Director: “It satisfies a demand that is not met. It is a market need since the drastic change imposed on the sector by the current financial situation has led small and medium-sized developers to be unable to carry out promotions. In the end, this has resulted in a lack of real estate supply in some urban centers”.
He refers to the small plots of land in the center of Barcelona or Madrid, citing the Tetuán neighborhood as an example, which has always been exploited by smaller developers because of its size. However, these developers are now having trouble financing them. The flipping house promotes an alternative financing model with private investors and crowdfunding platforms that gives viability to these projects, allowing the coexistence of the market between large and smaller developers.
On the other hand, the possibility of converting commercial premises into housing adds value to an asset in the doldrums. One cannot ignore that, in addition to the crisis, the closure of businesses, and the rise of e-commerce, there is now the injection of empty premises from the banking networks.
Faced with the possibility of buying to live or buying to rent, experience shows that the end client profile is more of an investor. However, especially those real estate rescue operations such as those carried out by Viflip meet the demand of those looking for their home or even unique properties.
The appraiser’s warning
It is crucial to understand that the appraisal price and market price may diverge more than usual in a real estate product such as house flipping. At Tinsa, Escobar explains that “from the appraisal point of view, the appearance of the property should not be confused with the real quality of the property in terms of the objective variables that influence the value such as location, quality of the surroundings, quality of the building, community services and common areas, interior distribution, sunlight, noise, floor height, exterior or interior, construction qualities. Many of these properties have been renovated with average qualities, adding an important point of decoration and furnishing, which could confuse the future buyer about the real quality of the property”.
Having made the consideration, Escobar considers that the strong demand of the market in big city centers “can consolidate the phenomenon of house flipping” due to their great offer of services.
Source: Idealista News
