Home flipping is a labor of love that can yield lucrative returns for those willing to make prudent choices in the fixer-uppers they buy and endure the process of an extensive renovation. But it's a route homebuyers are taking increasingly often to earn that healthy ROI, according to RealtyTrac, the Irvine, Calif.-based housing data company and online marketplace, which says the number of active home flippers is at the highest levels seen in recent years.
"There were 110,008 investors or entities that completed at least one home flip in 2015, the highest number of home flippers since 2007, when there were 130,603 home flippers," RealtyTrac said. "The peak in the number of active home flippers was in 2005, with 259,192. There were 1.63 home flips per investor in 2015, the lowest ratio of flips per investor since 2008."
Some 179,778 U.S. single family homes and condos were flipped in 2015, according to RealtyTrac -- about 5% of sales -- and, more staggeringly, flipping in 12 major markets now is above 2005 levels, said RealtyTrac. . As for metros with especially torrid flipping, RealtyTrac pointed to Pittsburgh (19% above 2005 levels), Memphis (18% above 2005), Buffalo (12% above 2005) and San Diego (4% above 2005), Seattle (4% above 2005) and Birmingham, Ala.(4% above 2005).
What does that mean? There just are more hobby flippers - or maybe they should be called part-time flippers - who are attracted to the scent of what smells like easy money.
Understand this: flippers are not necessarily bad for a real estate market, insisted Daren Blomquist, a senior vice president at RealtyTrac. He said that in many metros, flippers focus on gentrifying - but not prime - neighborhoods where they spruce up a house. Doing that yields their profit. By Blomquist’s math, flippers bought homes at an average of 26% below estimated market value and they sold them at 5% above estimated market value. That produced an average profit per home of $55,000, said Blomquist.
Rocky Lalvani, a 50-year-old flipper in Harrisburg, Pa. said he strategically looks for foreclosed homes, especially ones that “have been trashed.” A sweet spot for him to buy is $50,000. He puts maybe $20,000 to $30,000 into the house - often they need a new furnace, for instance, maybe significant new plumbing - and he sells “in the low $100,000’s.”
In Greeley, Colo., 37-year-old Mark Ferguson said he has “flipped over 100 houses” and said he likes to buy at the lowest prices in his market ($100,000 to $150,000, he said). He puts in $20,000 to $25,000 on average in repairs, rehab and updates. And his hope is to sell at $175,000 “if I bought for $100,000.”
You want to sign up for those profits? Hold on. There is more to chew and some of it is worrisome for future flippers.
For starters: know that to get in the game you need cash. In fact, most flipped homes are bought in all cash deals, said Blomquist, who added that in 2015 70% of flipped homes were bought for cash. That, he added, is a key reason flippers can win discounts. They can close, fast, and there are no uncertainties about a mortgage going through.
The next problem: inventory of available homes for flipping is dropping, said 35-year-old Ryan Paliukaitis, who said he has been “doing this fulltime” since 2006 and operates across much of New Jersey. That has become key, he said, because it just is getting harder to find deals. “With increased competition comes bidding wars and thus less profit on the fix and flip deals,” he said.
A big reason for that is - as the RealtyTrac data show - a lot more of us are piling into flipping.
That raises another problem, said 53 year-old Irvine, Calif. realtor and sometimes flipper Jerry Koller: he is seeing more homes on the market that aren’t selling, because hobby flippers did fast cosmetic jobs on homes and then have expected huge returns. It does not happen that way. Koller said he knows one flipper in Orange County who bought a number of homes, put new paint on the walls, new flooring in most rooms, then upped the price $100,000. “They aren’t selling,” said Koller, who indicated this seller has been forced to put those homes up for rent.
Will flippers be left holding an expensive bag of unwanted property? Experts shrugged. That all depends on the velocity of the home buying market. If demand stays high - and mortgage rates stay low - there will be opportunities for flippers who can buy low and sell high. That is a constant.
The other constant: flipping is “definitely not for the faint of heart,” said Koller. A lot can - and often does - go wrong. But when the profits are there, flipping is sweet - and that is why so many more now want into it.