A New Twist on the Home Flip in Memphis
The following is an excerpt from an article that first appeared in the July 2017 Housing News Report, an award-winning monthly newsletter published by ATTOM Data Solutions.
Memphis is the epicenter of an emerging trend in home flipping — flip-to-rent.
The Memphis metro area posted the nation’s highest home flipping rate as a percentage of home sales in Q1 2017 (15.1 percent), more than twice the national average of 6.7 percent, according to ATTOM Data Solutions.
But only 8.1 percent of homes flipped in Memphis went to FHA buyers, typically first-time homebuyers, despite the market’s reasonably priced homes — median home prices were $112,900 in the first quarter of 2017, well below the national median of $225,000.
Turnkey Rental Central
Many of the remaining home flips not sold to FHA buyers are being sold to rental property investors as so-called “turnkey rentals.”
“Memphis is and has been for quite some time now a very large turnkey center because of the potential high rents compared to purchase price.” said real estate attorney Joseph T. Kirkland, president of the Memphis Investors Group. “There are good investment pockets in all areas of the city, and there are bad investment pockets in all areas.”
$25 Million Renovating Rentals
Chris Clothier is in the thick of the flip-to-rent boom in Memphis.
Clothier estimates that his company, MemphisInvest, spent over $25 million last year alone in renovating properties, pulling around 1,000 work permits.
“Instead of a quick turnover it’s a long-term fix-up,” he said. “We have an investor interested in holding for a long time, and we have a resident who wants to stay. Given the right environment, it’s a low risk, very consistent kind of city.”
MemphisInvest manages just over 3,000 properties in the Memphis area for about 1,600 investors, according to Clothier, and the company has expanded its operation into the Dallas and Houston markets, where it now manages just over 1,300 properties combined. Just recently the company opened new offices in Oklahoma City and Little Rock.
Rental Research Still Required
Companies that offer turnkey investment solutions catering to the passive investor does not excuse individual investors from doing their necessary research to understand a market, according to Kathleen Kramer, a licensed real estate broker with the Long Beach, California, office of Keller Williams Commercial.
Kramer helps clients purchase investment properties across the country, including in Memphis, and she said that flying out to Memphis, doing her due diligence and building business relationships was key before she starting helping clients who were interested in buying properties there.
What she found is that investors looking at going into Memphis must take a block-by-block approach to identifying potential properties.
“People who invest in Memphis need to be careful what part of town they’re buying in. Neighborhoods change in just a couple of blocks,” she said.
Buy for $8,000, Rent for $800
To investor Eddie Speed, entrepreneurs like Clothier are filling a void by introducing the turnkey property into the marketplace, and as a result bringing up the housing standard for neighborhoods and putting money into the local economy.
“I can remember looking at BPOs in Memphis and I remember a Memphis asset that appraised for $8,000 and rented for $800 a month,” said Speed, the founder of NoteSchool. “You’re selling a single family house like a one unit apartment complex. It’s the exact same thing. Selling a house on the income approach.”
Tightening Inventory for Turnkeys
Having represented buyers from out of state as well as foreign buyers from Australia, New Zealand, China, Singapore, Japan and England, Kirkland realizes that the turnkey providers are selling product at a price point that’s at the top of the market, generally higher than what local investors would pay for similar product.
Tighter inventory caused in part by investor activity in Memphis is creating challenges for own-occupant buyers as well, according to Realtor Melba Jones.
“We’re running into issues of not finding them a home or taking longer to find a home, or going further out of the market to buy because we don’t have the supply,” Jones said. “The investors are purchasing all the homes. We’re getting a lot of people moving here for a job change. Moving from other states.”
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