More SFR Investors are Selling at a Loss

Article originally posted on Globe St. on April 24, 2023

For years single-family homes have been an attractive asset class for investors in large part due to low mortgage rates. Now, though, the financial equation is changing, and some investors are finding they are getting burned as they seek an exit.

In March of this year, one in every seven U.S. homes sold by an investor went for less than the investor bought it for, according to Redfin. In February, a similar situation occurred, which represented the highest since 2016 and nearly triple the share of a year earlier.

Certainly, not all investors realized a loss. In fact, the average investor who sold in March did so for 45.9% more or $145,714, than they paid for it. But that number wasn’t as good as previously. A year ago, it was 55.3% and at the peak of the pandemic in June 2022, it was 67.9%.

The culprit is higher mortgage payments, which have taken a bite out of profits and pushed a typical buyer’s monthly payment up $300 from a year ago, which has derailed homebuying demand and, in turn, caused sales prices to drop. The snowball effect has done more and resulted in investor-owned properties selling at a loss.

Phoenix Redfin salesperson Van Welborn shares a real-life example of what’s occurring.  “I recently showed one of my buyers a three-bedroom, single-family home in Glendale (Arizona) that was listed by an investor. My client ultimately found another house they liked better, and the investor ended up losing about $20,000.”

In that case, the investor had bought the home for $450,000 and sold it for $480,000 but put $50,000 of work into it. The house sold below the $550,000 list price after sitting on the market for almost four months.

The current scenario is having different effects on the two investor segments. Many long-term investors who rent properties are sitting out purchases until a stronger market returns, says Redfin Senior Economist Sheharyar Bokhari. Many flippers can’t afford to, however, so they sell and cut their losses, Bokhari says. In fact, one in five homes flippers sold in March went at a loss, higher than the share for investors. Nevertheless, investor activity has fallen a record 46% year over year in the fourth quarter.

Multiple markets experienced the trend of investors selling at a loss. In Phoenix, 30.7% of homes investors sold in March went for a loss and represented the highest share of 40 metros Redfin analyzed. Other cities experienced losses too, including Las Vegas, Jacksonville, Sacramento and Charlotte. During the pandemic, these were the cities where home purchases had soared.

The Redfin analysis was based on the company studying county records and MLSA data across 40 of the country’s most populous metropolitan areas.