The number of people flipping property in the U.S. hit new highs during the beginning of this year, and the profits made from those flips also reached new levels.
In the first 3 months of 2016, 6.6% of all single family home and condo sales were flips. That’s 43,470 properties and reflects a 20% increase from the last 3 months of 2015.
It may sound like the flipping business is picking up major speed, but in reality, it’s up just 3% from last year at the same time and 26% below the peak of home flipping in Q1 2006. Flips at that time accounted for 9% of all properties sold.
This data comes from RealtyTrac’s newly released 2016 Q1 U.S. Home Flipping Report. The information is gathered from publicly recorded sales in more than 950 counties, or 80% of the U.S. population. The firm defines a home flip as a property that is resold within a 12-month period.
Daren Blomquist, senior vice president at RealtyTrac, said, “After faltering in late 2014, home flipping has been gaining steam for the last year and a half thanks to falling interest rates and a dearth of housing inventory for flippers to compete against.”
He added that he has some concerns about this flipping frenzy, saying, “While responsible home flipping is helpful for a housing market, excessive and irresponsible flipping activity can contribute to a home price pressure cooker that overheats a housing market, and we are starting to see evidence of that pressure cooker environment in a handful of markets.”
Fortunately, despite the 20% jump in flips at the beginning of this year, the numbers are not yet above what’s considered the norm.
According to the report, 71% of homes flipped in the first quarter were purchased with cash — compared to only 37% who purchased with cash at the height of the flipping boom. When flippers spend their own money versus other people’s money, they tend to stay more conservative.
On average, homes have been purchased at a 27% discount below full market value and resold for a 6% premium above full market value.
9 metro areas hit new all-time highs in home flipping. That’s 7% of the 126 metro areas that were analyzed and includes Baltimore, Buffalo, Huntsville and New Orleans.
Seattle, Virginia Beach and San Diego, California also reached new highs since home prices bottomed out in 2012. In Seattle, home flips increased 32% from the previous quarter and were up 5% from a year ago.
But don’t go off running to Seattle to do some flips just yet. More inventory is starting to come to market in the area, which could slow down growth moving into 2017.
That could be true for many inventory starved markets. It can take years for builders to get up and running, and by the time they do, they may have missed out on the hottest part of the seller’s market. As prices rise, more homeowners put their homes on the market, creating new inventory – which often occurs just when builders are ready to sell.
The common myth during a hot sellers market is that prices will rise forever. This has never been the case. In fact, markets cycle every decade. It all comes down to supply and demand. Right now supply is low, but that will change – at which point prices will stabilize or even decline.
Even linear markets like Ohio are now becoming hot seller’s markets, simply due to lack of inventory. Prices are rising in Cincinnati, Dayton and Columbus, attracting more investors to the area. These areas posted year over year gains in their home flipping rate.
“As available listing inventory has remained low across Ohio, rising residential home prices and strong buyer demand are fueling a resurgence of small investors entering the market to rehab and flip residential homes,” said Michael Mahon.
Markets where the share of homes flipped surpassed the national average included Tampa, Las Vegas and Jacksonville.
Rising home prices have increased profits.
According to RealtyTrac’s report, homes flipped in Q1 2016 yielded an average gross profit of $58,250. That’s the highest average gross flipping profit since Q4 2005 — a more than 10-year high.
The average gross flipping profit is the difference between the purchase price and the flipped price (not including rehab costs and other expenses incurred, which flipping veterans estimate typically run between 20% and 33% of the property’s after repair value).
The average $58,250 gross flipping profit in Q1 2016 represented an average 47.8% return on the original purchase price, the highest average gross flipping ROI since Q3 2012.
If you’re hoping to gain this kind of profit from flipping houses, it’s important to remember that it’s much easier to achieve when prices are on the rise. It’s quite a different story in a stable or worse, in a down market.
Do not rely on future appreciation in your calculations, but rather leave a 10% margin for error on both renovation costs and potential market declines. That means you’ll need to purchase the property for at least 30-40% below market value, of course depending on the amount of renovations needed.
Flipping homes is not for the faint of heart. If it’s your first time, partner with someone who’s done it many times before. Splitting profits can be much more profitable than potential losses due to lack of experience and knowledge.