U.S. House Flipping is Coming to an End
In the real estate industry, house (or property flipping) is a strategy of purchasing properties and selling them in a short time frame (under a year – and often much quicker) for a profit. Sometimes investors target properties that are in a rapidly appreciating market and resell them with little or no additional investment. In other cases, a quick “fix up” is used where the investor employs his knowledge to make the property more appealing to potential buyers through renovations or even cosmetic changes.
Recently, ATTOM Data Solutions, a major aggregator of real estate data released its 2nd quarter 2018 report, which showed a downward trend in return on investment (ROI) for real estate flipping. The statistics show that homes flipped in the 2nd quarter of this year yielded an average gross return of 44.3%, down from 47.8 in the previous quarter, and down from 50% in the 2nd quarter of 2017. In fact, the ROI was the lowest since the 3rd quarter of 2014.
But a deeper dive into the numbers is even more revealing. The study shows that 48,766 homes were flipped in the second quarter of 2018, a home flipping rate of 5.2% of all sales. This is down significantly from a 6.6 percent rate in 1st quarter of 2018 (about a 17% decline), and down from a 5.4% flipping rate in the 2nd quarter of 2017.
Further, homes flipped Q2 2018 sold for an average of $65,520 more than they were purchased for. This, as compared to an average of $69,500 in Q1 2018, and down from an average profit of $69,000 a year ago. The average flipping profit was the lowest since Q2 2016.
The reasons for the declines are probably the result of a strengthening economy and robust employment growth. “Fewer distressed sales are limiting the ability of home flippers to find deep discounts…,” said Daren Blomquist, senior vice president at ATTOM data Solutions.
In support of this analysis, of all homes flipped in Q2 2018, 32.3% were purchased by the home flipper via a distressed sale (either a foreclosure or bank owned). This is down from 35.8% from the previous quarter and down from 38.7% from a year ago. The highest rate occurred in in Q1 2010 (shortly after the financial meltdown of 2008), when distressed sales represented 68.2% of all homes flipped, almost twice as much as currently.
According to Jeff Pintar, founding partner and CEO of the Pintar Investment Company, “The business of adding some superficial, cosmetic upgrades for a profit is no longer an option…”
In addition to all of the other factors discussed, more expensive home prices, are forcing some home flippers to seek financing, instead of buying for all cash. Therefore, when it comes time to flip the home, the investor must now add the interest rate (and points) he is paying on the mortgage to figure out his profitability. This, of course, negatively impacts his bottom line.
This trend is good news for home owners and long term, serious investors in that home flipping tends to distort the market, and sometimes serves to deceive people who may not be aware that the home they are viewing has been “upgraded” in a superficial way.