As a viable exit strategy for investors of every level, rehabbing and flipping houses has proven to be extremely lucrative for those who take the time to understand the intricacies associated with it. Depending on the current direction of the housing market, it can be highly profitable. Of particular concern, however, are reports of a regression in the “flipping” industry. Rapid home value appreciation has made it increasingly difficult to turn a reasonable profit.
“Home flipping is settling back into a more historically normal pattern after a flurry of flipping during the recent run-up in home prices in 2012 and 2013,” said Daren Blomquist, vice president at RealtyTrac. “Flippers no longer have the luxury of 20 to 30 percent annual price gains to pad their profits. As the market softens, successful flippers will need to focus on finding properties that they can buy at a discount and efficiently add value to.”
Fortunately for those who have made a commitment to the investing industry, all is not lost. In fact, flipping houses remains as lucrative now as it has been in recent years. The key is understanding where to look for deals. According to a report issued by CNBC, bargain shopping has made it hard for flippers to turn a profit because of the margins it offers. However, high-end neighborhoods are becoming a very attractive alternative. Investors are turning to more expensive neighborhoods, as they offer bigger profits.
On a national level, home price gains have showed significant signs of easement. Subsequently, the volume of flipped homes has decreased. Flippers represented 4.6 percent of all U.S. single-family home sales in the second quarter of this year, down from 5.9 percent in the first quarter of 2014 and down from 6.2 percent in the second quarter of 2013, according to RealtyTrac.
Essentially, the average profit for flipping a home has decreased in the last year because home prices have inched closer to their record highs. There is simply less room to make a profit. During the downturn, houses could be acquired for a fraction of what they were worth in the past. With lower purchase prices, there was more room for profit. The average gross profit of $46,000 per flip, a 21 percent return, was down from 31 percent a year ago, which was the peak since RealtyTrac began looking at this segment of the market at the beginning of 2011.
The good news for flippers, however, is that high-end flips are still a viable option. More expensive properties permit room for larger profit margins. Real estate investors across the country are starting to recognize this particular trend. There has been a migration from cheap, foreclosure properties to more expensive neighborhoods.
Flips with a sale price of $750,000 or more rose 21 percent from a year ago, while homes priced below $400,000 declined as a share of all flips from a year ago, according to RealtyTrac. Homes priced between $750,000 and $1 million had a 41 percent return, which explains why flippers are heading to higher-priced neighborhoods.
The following markets represent the metros with the best returns on flips in the second quarter of 2014:
- Pittsburgh (106%)
- New Orleans (76%)
- Baltimore (73%)
- Virginia Beach (66%)
- Daytona Beach 63%)
Metro areas with the highest dollar amount of average gross profit (more than $100,000) on home flips include:
- San Jose
- Washington D.C.
- San Diego
- Los Angeles
“The secret to flipping houses is getting the property to be at a great price, and there’s just very, very few properties in our area at low prices,” said David Fogg, a real estate agent in Burbank, California.