Areas with rapidly rising home prices tend to be great markets for flipping houses. And since home prices have been on the rise, last year’s home flipping market was the hottest it’s been since 2005. But what comes up must come down, and no one wants to be in the middle of a flip when the market shifts.
RealtyTrac says that flips made up 5.5 percent of all U.S. home sales last year. That’s about 180,000 single-family homes and condos, which is up from 5.3 percent in 2014 and represents the first increase for house flipping in four years.
But house flipping varies from place to place. RealtyTrac analyzes data from 110 U.S. cities and says that house flipping activity rose in 83 of them last year.
The real estate tracking firm says as home prices rise, more house flippers jump into the market, which also helps push those prices higher. RealtyTrac defines a flipped house as one that’s bought and sold in a 12-month period, at a profit, of course.
And while house flipping is a sign of confidence that prices are heading up and not down, it can also be a sign of trouble for the hottest markets. RealtyTrac says that even though the 5.5 percent of flipped homes was “below” the peak in 2005, it says that 11 percent of today’s markets are “above” those levels. That’s 12 of the 110 metro areas studied by RealtyTrac.
Among the hottest markets are Pittsburgh, Pennsylvania at 19 percent above 2005 levels; Memphis, Tennessee at 18 percent; Buffalo, New York at 12 percent; San Diego, Seattle and Birmingham, Alabama at 4 percent; and Cleveland, Ohio at 3 percent.
Areas that may not have higher flipping rates than 2005 but have experienced a gargantuan rise in house flipping activity include Lakeland, Florida; New Haven, Connecticut; Jacksonville, Florida; Homosassa Springs, Florida; and Akron, Ohio. Those home flips were up 37 – 50 % last year.
The area with the most homes flipped of any market across the nation in 2015 was the Miami area. That’s been a hot market for a few years so the increase in home flipping was just 4 percent last year but the total number of homes flipped was more than 10,000.
RealtyTrac says that profits have also been the highest since 2005. It says that flippers averaged a gross profit of $55,000 in 2015 and the return on investment was about half that amount. The net profit includes the cost of repairs, upgrades, and other expenses.
RealtyTrac also points out another interesting trend. It says that smaller investors are jumping into the flipping market. That’s partially due to the fact that the big investors who snapped up homes during the downturn with all-cash deals have stepped back a little. So there are more opportunities for the investor who does just a few flips per year, possibly with a loan.
Turning now to Redfin, that real estate firm also reports the first increase in house flipping in four years, but with different results. It says an estimated 3.1% of all home sales were flips last year, or about 43,000 homes. And, it says that flippers grossed an impressive $102,400 per home on average. That number again represents renovations, upgrades, other expenses, and profit.
The numbers vary between Redfin and RealtyTrac because they analyze different markets. While RealtyTrac analyzes 110 cities, Redfin looks at 28 of the largest ones.
Redfin says that home flippers with the highest gains were in San Francisco where they grossed an average $216,000. Flip prices in San Jose and Oakland were close behind with $174,800 and $152,600 in gains. The lowest gross profits were in Las Vegas with an average $53,600 per flip. In Atlanta, it was $68,500, and in Raleigh-Durham it was $71,400.
Trulia also reports that markets with the highest price appreciation are also, in general, the ones where flipping activity is the strongest. It says of the 10 housing markets with the largest increase in flips over the past year, 6 are in Florida. Miami leads the pack followed by Daytona Beach, Jacksonville, Orlando, Tampa, and Cape Coral.
The other four areas outside of Florida are Las Vegas, Winston-Salem and Raleigh in North Carolina, and Birmingham, Alabama.
Although the presence of house flipping can represent “confidence” in a rising market, real estate professionals say it can also be a red flag, and possibly a catalyst for a down market. Home flips can artificially increase prices in certain areas and contribute to the start of a real estate bubble.
People who live in house flipping areas may also have a mixed view of house flippers. While house-flipping activity can push home prices and home values higher, it also make it tough for people looking to buy a home. Many house flippers will make all-cash offers with no contingencies and a fast close. Someone who wants to buy with a loan and do lots of inspections and think about it for a week or two has no chance of winning that deal.
There’s also concern about how the house-flipping activity will affect a neighborhood. For example, some people in Washington D.C. told Redfin they are not happy when investors buy up historic homes and remove some of the original features during a renovation. They say they appreciate developers who take the time to maintain the original charm of the older homes.
On the other side of the coin, house flipping is risky business. You are gambling on the idea of buying a home, doing the renovations and upgrades for a reasonable amount of money, and then making enough of a profit to justify the effort in the first place.
There are plenty of things that can pop up and nip at your profits. You have to factor in the cost of repairs and upgrades along with other expenses for buying and selling the home, any mortgage interest if you have a loan, the cost of insurance or taxes while you own that home, and other unexpected expenses that are sure to occur. You could also incur weather problems or inspection delays, or trouble selling the home after all is said and done.
By the time you’re done with the renovation, the market could be in a downtrend. You’ll also likely be competing with professionals operating in the same market who can get it done faster, better and cheaper than you can.
You also have to pay Uncle Sam if your profits represent an income – which you hope they will – and that income is taxed at ordinary income rates.
The term “house flipping” makes the process sound so fast and easy. But, there are a lot of expenses, possible obstacles, and a potential to lose money instead of making a profit. But it you get it right, you can earn a substantial profit.