The average gross profit for investors who bought a home and market it within six months increased about $10,000 last year, basing on the data firm RealtyTrac. (The figure shows the difference between the purchase and resale prices and does not take into account investments in the home, like repairs.) As real estate prices have increased over the past couple years, this activity may become less profitable, and less attractive to investors.
“Since we are seeing home price appreciation, investors are more interested than ever in flipping homes”, says Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty, a brokerage firm covering the Oklahoma CityandTulsa markets. “The challenge for many would-be flippers is a shortage of available inventory to flip.”.
Last year, investors flipped 156,826 single-family homes, 16 % more than in 2012 and more than double the 2011 figure, basing on data from RealtyTrac. The average gross profit on single-family property flips was $62,761.
Flippers can lose money if they pay too much for a property, underestimate the costs of repair or overestimate market demand. In general, it took 84 days typically to flip a home last year, two fewer days than in 2012 and down from 100 days two years ago, the Irvine, Calif.-based analytics company stated.
“Despite what you see on cable TV shows, margins on home flipping aren’t usually enormous, and a couple of miscalculations can put a flipper in negative financial territory pretty quickly,” says Rick Sharga, executive vice president at Auction.com, that runs an online auction platform for real estate properties from Irvine, Calif. “In a similar way, overextending oneself– either financially or from the standpoint of how many properties have to be fixed all at once– can torpedo a flipper’s business.”.
In the last few years, the Federal Housing Administration has placed more limitations on home flipping. For instance, if an investor is flipping a house and someone wishes to buy this property with an FHA loan, any resale may not occur 90 or fewer days from the last sale for the buyer to become eligible for FHA financing.
In addition, for resales that happen between 91 and 180 days where the new sales price goes over the previous sales price by a minimum of 100 %, FHA requires supplemental documentation verifying what work was done to a property, to justify the property’s increase value.
“They’re trying to avoid some of that aggressive flipping where people double-escrow,” says Jon Maddux, co-founder of Afterforeclosure.com, a San Diego firm that helps consumers with tarnished credit histories get new loans. (Double escrow is when a property is sold to a buyer, who the same day resells the property, typically for a greater price.).
The remarkable increase in property values was a big reason why home flipping was so favored last year. Homes with a flipped sale price above $400,000 raised 36 % from the year before, while flips on single-family housing units with a sale below this price were only 17 % higher on a yearly basis.
Another factor for the home flipping revival in 2013 was the fairly high levels of distressed property sales over the past two years, featuring bank-owned property sales, short sales and sales at foreclosure auctions, in a housing market with restricted inventory.
“Flippers were given the two main elements they need to succeed: low-priced inventory and determined buyers,” Sharga says. “Many individual investors are buying distressed homes and afterwards fixing and flipping them to institutional investors, who have had a huge appetite for single family homes to rent out, and are typically less price-sensitive than typical homebuyers.”.
Last year showcased a frenzy of cash buyers with multiple offers, as Maddux compared it to 2005 before the housing crisis began. But since rates have gone up over the last few months, and the tightening of underwriting guidelines because of new government regulations, it has become harder for homebuyers to get loans.
Home-Flipping Resurgence May Decrease This Year.
“You’re not going to see a big ax drop and nobody buy. You’re just drawing people off the table that could have purchased or were checking out buying and now they can’t qualify for that house they might have wanted,” Maddux adds. “This year is may still be a strong year where we see a great deal of sales– traditional and investor– but it will be no more than a year ago. The RealtyTrac numbers are unsustainable.”.
Sharga foresees a similar outlook for home flipping in 2014.
“The elements that drove flipping in 2013– rapidly rising home prices and institutional investor purchasing- are likely to decrease in 2014, which will slow down volume,” Sharga continues. “Likewise, tighter credit due to the implementation of the CFPB’s qualified mortgage rules, and extremely conservative appraising may make it more difficult for buyers to get financing on higher-priced homes sold by flippers.”.