If you are a fan of HGTV, you may think that everybody is flipping homes for fun, profit, or both. Whether the inspiration comes from TV shows or rising home prices, new numbers from RealtyTrac suggest that home flipping activity is on a significant upward trend.
The RealtyTrac Year-End Home Flipping Report for 2015 shows that just less than 180,000 single-family homes and condominiums were flipped in 2015. To be considered as "flipped," a home must have been sold twice within a twelve-month period. Renovation does not have to be involved, but is usually necessary to add significant value to the home.
The nationwide average gross profit on flipped homes was $55,000, the highest mark in ten years. Gross flipping profit reflects the pure difference in price between the first and second sale and does not include rehab costs and other auxiliary expenses (typically between 20% and 33% of the property's post-renovation value).
After four years of decline, the annual percentage of all home sales that were flips rose to 5.5% in 2015 as higher home prices tempted smaller investors to join the trend. Just over 110,000 investors or entities accounted for the 180,000 flips in 2015, the highest number since 2007. The average number of home flips per investor in 2015 was 1.68, the lowest number since 2008.
Flipping activity in twelve metro areas topped the pre-housing-crisis numbers from 2005. Pittsburgh, Memphis, and Buffalo experienced double-digit increases in the flipping market over peak 2005 levels.
Increases in house flipping could be a sign of another housing bubble, if the flips are mostly speculative in nature. Flipping a house on excessive amounts of credit in an overactive market can lead to disastrous results. However, as RealtyTrac Senior Vice-President Daren Blomquist notes, "…flippers in 2015 continued to operate within relatively conservative margins."
Even if flippers are staying relatively restrained, the rise in flipping can cause localized pricing and supply concerns. The lower end of the market is particularly vulnerable. As it is, home prices are rising overall — 6.9% year-over-year in January according to CoreLogic — and flipping consumes more of the affordable homes in the lower end of the market and raises their value. First-time homebuyers looking for starter homes can be priced out of the market.
Are you interested in flipping houses? If so, be aware that successful house flipping takes a significant amount of investment money and therefore a significant amount of risk.
RealtyTrac's Habits of Highly Profitable Home Flippers include:
- The Ability to Spot Deals – Flippers purchased their home at a 26% average discount below value in 2015. Spotting homes that are bargains or that provide high value with economical renovations are the key to profitability.
- Properly Assessing a Finished Sale Price – Do not get greedy or overestimate the value of your renovations. Successful flippers received an average of 5% above premium in 2015.
- Adding Value – Through their renovations, flippers added $55,000 in average value per flipped home in 2015.
- Understanding of the Market – Know what price range of renovated home will sell in a particular market. Flipping a home in a value range or geographical area that has limited demand can leave you stuck with a difficult-to-sell investment, as can adding greater value than the neighborhood and local market can bear through increased pricing.
Do you have these required home-flipping skills? If not, acquire them before you begin. Otherwise, join the rest of us on the couch and watch in awe as the professionals do it every day on TV.