Low inventory of available housing for purchase along with escalating home prices have made it an exceedingly difficult business climate for real estate investors to work in – particularly those who want to fix and flip homes.
At the end of the day, flippers need to identify properties with good potential for considerable discounts at the front end of the deal and worthwhile profit margins at the back end. This is becoming increasingly time consuming, especially in major markets across the country.
“It’s getting difficult for flippers to find homes to flip. While the macro trends of low housing inventory and rising home prices are favorable for flippers, they are also a double-edged sword, attracting more competition and reducing the availability of deals – particularly in the most fundamentally sound local markets,” says Daren Blomquist, Senior Vice President of Communications at Attom Data Solutions based in Irvine, Calif.
“This is chasing some investors into markets and neighborhoods which may be less fundamentally sound but also offer more value-add opportunities for flippers in the form of aging housing inventory. The common denominator is that they are secondary or tertiary markets. They tend to be more off the beaten path.”
Q3 Report Shows Best Markets to Profit In
In its third quarter 2016 U.S. Home Flipping Report, Attom Data Solutions identified 92 metropolitan statistical areas nationwide where at least 90 homes were flipped during the quarter.
For purposes of analysis, Attom defines a flip as a property that is sold in an arms-length sale for the second time within a 12-month period based on publicly recorded sales deed data collected by the firm.
While the data revealed a number of ways to identify the best markets for flippers based on current market trends, the most telling results were those showing which of the secondary markets show the greatest profitability potential for flippers – both in terms of the best discounts upon initial purchase and the greatest return on investment (ROI) upon resale.
The nation’s top 10 markets that showed the highest gross ROI during the third quarter were led by Cleveland, Ohio (155.3 percent); followed by Pittsburgh, Penn. (146.9 percent); Reading, Penn. (116 percent); Philadelphia, Penn. (114.8 percent); and Clarksville, Tenn. (107.4 percent).
The remaining markets in the top 10 included Baltimore, Maryland (100.9 percent); Dayton, Ohio (100.2 percent); New Orleans, Louisiana (93.7 percent) Cincinnati, Ohio (90.1 percent); and Harrisburg, Penn. (87.5 percent)
A number of these markets were where flippers were able to purchase properties for the biggest discounts during the quarter, including Pittsburgh, Penn. (53.5 percent); Reading, Penn. (51.6 percent); Cleveland, Ohio (51.3 percent); Clarksville, Tenn. (46.6 percent); and Philadelphia, Penn. (46.3 percent).
“While the high-level gross flipping profits are impressive, it’s important to note that they do not include all the costs incurred by flippers including rehab, financing, property taxes and other carrying costs,” Blomquist explains.
“It’s also important to note that the overall averages mask the fact that not every flip ends profitably for the investor. About 8 percent of the homes flipped in the third quarter actually sold for less than what the flipper purchased them for, and about 21 percent of the flips yielded a gross flipping ROI below 10 percent – likely meaning the flipper walked away with a net loss on the deal.”
The third quarter report also notes that the highest gross flipping ROI of 58 percent was from homes sold in the $50,000 to $200,000 price range. The lowest flipping ROI of 26 percent yielded from sales in the $2 million to $5 million price range.
Other Factors to Consider
The Attom report also showed that the number of flippers who are flush with cash to purchase properties was at an eight year low in the third quarter. This is having a profound effect in markets such as Seattle, where the lack of available inventory and appreciating home prices are taking their toll on investors.
“The fact that over half of homes that are bought for flipping are financed rather than cash purchases signifies that prices are getting to levels that are out of reach for flippers,” says Matthew Gardner, chief economist at Windermere Real Estate. “Rising mortgage rates will be a further inhibitor to home flipping and will likely cause these numbers to contract even further.”
Overall 68 percent of all flippers are still buying with their own cash. However, with the advent of online financing platforms – including some crowdfunding websites – Blomquist expects that flippers who are already financing their purchases will continue to do so since financing will allow them to do more flips without using their own cash.
“With the Federal Reserve poised to raise its benchmark rate at least three times over the next 12 months, it’s likely that we’ll see rising mortgage rates in 2017,” says Rick Sharga, executive vice president at Ten-X, based in Irvine, Calif. “Investors who are depending on financing to make their purchases will need to be more selective in determining which properties will pencil out, and make sure to consider, local real estate market conditions, as well as local economics and demographics.”
Homes purchased for flipping during the third quarter were bought at an average 25.2 percent discount below the “after repair” market value and sold by the flipper for a 6.7 percent premium above market value on average.
Homes flipped during this period were on the market for an average of 180 days, down from a 10-year high of 185 days in the previous quarter.
Of the homes sold by flippers during the third quarter, 53 percent sold for $200,000 or less, while 33 percent of all homes flipped during the quarter sold for between $200,000 and $400,000.
Still a Positive Outlook for Flippers
While the inventory shortage is causing increased competition for investors looking to locate, purchase and turn over properties as quickly as possible, Blomquist sees a lot of positives going forward.
“I believe we’re going to continue to see homes to flip because there are some fundamental market factors in place that are favorable to flippers,” he says.
For one, not only is there a low inventory of existing housing product available in the marketplace, but there is also a lack of new homes being built, meaning that the homes they are flipping and putting back into the market do not have to compete very much with new housing stock.
“If the flipper fixes up the home properly, then it’s almost like a new home. And then of course home price appreciation has been very strong so flippers can ride the coat tails of that price appreciation.”
The other significant contributing factor to continuing demand for flipped homes is the rental market.
“To have homes that are rentable you need a flipper to go in and buy and rehab it and then sell to a single family rental company. It’s all fueled by the strength of the rental market,” Blomquist notes.
Whether an individual rent and hold investor, or a rental company, the goal is to get their hands on properties that are in good condition and immediately rentable. And that’s the service that flippers can provide. In many of the secondary markets there are not a lot of good properties ready to rent, he says.
“The big takeaway for me is this is a very investor friendly housing recovery because home ownership rates are so low and homebuilders are being very hesitant on building. There’s enough margin in those deals for both types of investors to make money,” Blomquist says.
About the Author:
Joel Cone is a freelance writer based in south Orange County, California. For nearly a quarter century Joel’s career has focused on the residential and commercial real estate industries. After a decade as a staff writer for the Daily Journal Corp. group of newspapers, Joel was a regular contributor to California Real Estate magazine for the California Association of Realtors; was the original Orange County reporter for GlobeSt.com; wrote executive profiles for OC Metro magazine; and has been published in a number of real estate-related publications.
