Home flipping has come back strong, but it’s unclear for how long.
The average gross profit for investors who bought a home and resold it within six months increased about $10,000 last year, according to the data firm RealtyTrac. (The figure reflects the difference between the purchase and resale prices and does not take into account investments in the home, such as repairs.) If home prices stabilize as they are expected to this year, this activity may become less profitable, and less attractive to investors.
“Now that 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 before and more than double the 2011 figure, according to data from RealtyTrac. Overall, the average gross profit on single-family property flips was $62,761.
Flippers can lose money if they overpay for a property, underestimate the costs of repair or overestimate market demand. Overall, it took 84 days on average 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 said.
"Despite what you see on cable TV shows, margins on home flipping aren't always enormous, and a few miscalculations can put a flipper in negative financial territory pretty quickly," says Rick Sharga, executive vice president at Auction.com, which runs an online auction platform for real estate properties from Irvine, Calif. "Similarly, overextending oneself—either financially or from the standpoint of how many properties need to be repaired simultaneously—can torpedo a flipper's business."
In the last few years, the Federal Housing Administration has placed more restrictions on home flipping. For example, if an investor is flipping a house and someone wants 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 be eligible for FHA financing.
Also, for resales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by at least 100%, FHA requires additional documentation validating the property's value.
"They're trying to stave off 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, usually for a higher price.)
The dramatic increase in property values was a big reason why home flipping was so popular last year. Homes with a flipped sale price above $400,000 increased 36% from the year before, while flips on single-family housing units with a sale below this price tag were only 17% higher on a yearly basis.
Another factor for the home flipping revival in 2013 was the relatively high levels of distressed property sales over the past two years, including bank-owned property sales, short sales and sales at foreclosure auctions, in a housing market with limited inventory.
"Flippers were given the two main elements they need to succeed: low-priced inventory and motivated buyers," Sharga says. "Many individual investors are buying distressed homes and then fixing and flipping them to institutional investors, who have had a large appetite for single family homes to rent out, and are often less price-sensitive than traditional homebuyers."
Last year featured 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, it has become more difficult for homebuyers to qualify for loans.
"You're not going to see a big ax drop and nobody buy. You're just pulling people off the table that could have bought or were looking at buying and now they can't qualify for that house they might have wanted," Maddux adds. "This year is still going to be a strong year where we see a lot of sales—traditional and investor—but it will be less than a year ago. The RealtyTrac numbers are unsustainable."
Sharga foresees a similar outlook for home flipping in 2014.
"The factors that drove flipping in 2013—rapidly escalating home prices and institutional investor purchasing—are likely to slow down in 2014, which will slow down volume," Sharga continues. "Also, tighter credit due to the implementation of the CFPB's qualified mortgage rules, and overly conservative appraising may make it more difficult for buyers to get financing on higher-priced homes sold by flippers."