Home flipping is at a 14-year high but returns are down

Watch enough HGTV shows, and you’ll likely be inspired to buy a fixer-upper you can improve in the hopes of selling swiftly for a profit. But be careful, prospective home flipper: The latest data indicate that you may not pocket as much as you had hoped, and COVID19 has altered the flipping landscape. New findings from an ATTOM Data Solutions first-quarter 2020 U.S. Home Flipping Report reveal that flipping activity is up: 53,705 single-family residences and condominiums in America were flipped in the first three months of this year, comprising 7.5% of all home sales — an increase from 6.3% tallied in the previous quarter and 7.3% a year earlier. This marks the second-highest flipping activity level observed since the second quarter of 2006. Yet returns have dipped. The difference between the median sales price and the median paid by a flipper (the gross profit) rose, on average, from $62,000 in fourth quarter 2019 to $62,300 in first-quarter 2020. But the average gross flipping profit represents a 36.7% return on investment versus the original acquisition price, down from a 39.5% ROI noted in the previous quarter. That marks the lowest gross flipping ROI recorded in eight-and-ahalf years. Jeffrey Phelan, a commercial rehab lending consultant to Planet Renovation Capital in Melville, New York, says an average profit of 36.7% is still incredible, especially compared to the historic annualized average return for those who invest in the S&P 500 (around 10%). “But in many markets like the Northeast, return on investment tends to be lower because the market is more saturated. The inventory of homes for sale lately is low, with few distressed properties available. And there are more flippers in the market than ever. They’re all bidding on the same properties that would make good flips,” he says. Consequently, “the return on their investment is reduced because they are, in some cases, overpaying for their project,” explains Ruben Izgelov, CEO of We Lend, LLC, in Queens, New York. Teris Pantazes, the cofounder of Settle Rite, a Baltimore company that works with flippers, explains that flipping activity has increased recently because of a strong real estate market. “Still, returns are down because wholesale prices are trending higher due to demand for these types of properties. With demand comes inexperienced buyers who will accept a lower return because the profits still represent a great number for them,” Pantazes says. “Also, many of these inexperienced flippers are not properly budgeting for repairs and unexpected costs. These investors still make money, but an experienced flipper would likely have considered their extra expenses in their offers.” Nick Ron, CEO of House Buyers of America in Chantilly, Virginia, believes flipping activity and ROI is due to trend down. “These ATTOM Data Solutions statistics are primarily preCOVID-19. Because the market was strong in the first three months of this year, there was a steady rise and people made money. However, when the market goes down, new flippers will leave the industry just as fast as they came in,” Ron cautions. “As a result, margins will continue to shrink. But when new investors leave because the market goes down, margins will eventually increase.” Ask the experts if now is a good or bad time to be a flipper and you’ll likely get a variety of responses. “If you are an experienced individual who looks at flipping as a straight financial transaction and are happy with a lower flipping ROI, then now is a good time to be in the flipping market,” Pantazes suggests. “My only concern is that unexpected costs can easily ruin your return.” Phelan tends to agree. “In many markets, there are still a lot of aging homes and not enough turnkey properties for sale. Those two factors support the demand for flipped homes. However, you have to know your market well and it helps to have good relationships with dependable contractors so you can get in, get the property renovated, and get it back on the market quickly,” notes Phelan. “The longer you take to finish a flip, the longer you pay holding costs that eat away your profit.” Before jumping into a flipping deal that looks too good to be true, “study your investment carefully and prepare the proper comparables,” Izgelov recommends. “Always buffer in a 5% to 10% contingency in your budget in case something goes wrong. If, after crunching the numbers, your deal still makes sense, move forward.”