As housing analysts start to worry about the sustainability of
the recent run-up in the real estate market, a troubling trend has
returned, harking back to the days of the housing bubble: house
In the first half of 2013, home flipping -- buying and selling a
home (in the hopes of turning a profit) inside of six months --
increased 19% over the same period last year, and it increased 74%
over the first half of 2011, according to a report by
The improving housing market has upped the potential for quick
profits. Home flippers made an average gross profit of $18,400 on
single-family home flips, representing a 9% return on the initial
purchase prices, the report found. That's up 246% from the average
gross return in the first half of 2012. The Atlanta area led the
country in flipping activity, with nearly 6,000 properties flipped,
followed by New York, Phoenix, and Detroit. The amount of flipping
activity increased in nearly 70% of metro areas.
When housing bottomed out a few years ago, most of the
flippers were institutional investors
who snapped up thousands of foreclosed homes for cash at
rock-bottom prices before rehabbing them for resale. That kind of
flipping probably helped the real estate recovery, as investors
were able to soak up the excess inventory that plagued the market
and put a floor on falling prices. But the fire sale prices that
first attracted institutional investors have largely disappeared.
Now that a housing recovery is in progress, more traditional buyers
are trying to get in on the action, seeking investment returns
beyond what they can find in the stock market. "With home prices
appreciating as quickly as they are, that's going to attract more
of your mom-and-pop type investors who maybe don't do this full
time, or hobby investors," says RealtyTrac vice president Daren
Blomquist. In Daytona Beach, Florida, for example, more than 90% of
the more than 1,000 homes flipped last year were flipped by sellers
who only flipped one home, according to RealtyTrac data. Flippers
there took home an average gross profit of more than $50,000.
"We're in the early innings, but more people are getting back into
flipping as they look at potential returns," says Philadelphia
realtor Chris Somers. "But there is more risk when
non-professionals are involved."
HEADWINDS FOR FLIPPERS
Buying and flipping homes is not as quick and easy as it may look
on reality TV. Somers says mom-and-pop investors face three big
risks: overpaying for a property, underestimating renovations
costs, and overestimating the resale price. Plus, there are several
market forces working against flippers in today's market.
Home prices increased more than 12% in July, according to CoreLogic
-- the 17th consecutive month that the market showed gains, with
prices increasing by double-digits every month since April. But
realtors surveyed in June by the
National Association of Realtors
expects prices to rise an average 3% next year, a much more modest
rate. Part of the reason: rising mortgage rates.
Rates are currently 3.9%, but they're forecast to rise to more than
5.1% (which is still extremely low by historical standards) by the
end of next year, according to the
Mortgage Bankers Association
Rising prices are also pushing previously underwater homeowners
into positive equity, allowing more potential sellers to put their
homes on the market and easing the inventory constraints that have
pushed prices up so quickly. More than 3 million underwater
homeowners have been freed in the past year,
according to Zillow
. All of these factors point to a slower rate of appreciation in
home prices, making it harder for flippers to quickly turn a
Another headwind: bidding wars. Across the country, homes are
selling for 98% of list price, according to Zillow, and realtors in
booming markets report that multiple offers are pushing prices far
higher than the initial ask. "Flippers make their money by buying
under market value," Somers says. "Then no matter what prices do,
if you renovate, you're going to have a positive return. It's a lot
riskier if you're overpaying to begin with." Finally, as new home
construction roars back to life, competition is getting fiercer,
for contractors and equipment, as well as for eventual buyers.
Construction starts in July increased 5.9% over June and 20.9%
year-over-year, according to the
"Flippers are basically taking a house that hasn't been updated in
20 to 40 years and making it into a new house," says Jan Brzeski, a
private money lender who works with high-end flippers. That becomes
a much tougher sell when competing with actual brand new houses.
LESS RISK TO THE MARKET
Even if housing slows substantially in the next year or so, it's
unlikely that today's flippers will tank the real estate market.
Unlike the go-go days of the last real-estate bubble, it's still
pretty tough to get financing, which means today's investors are
either paying all cash for properties or they have significant skin
in the game. That makes it far less likely for them to walk away
from a property, even if they have to take a loss.
"Banks just aren't going to let people get in over their head now,"
says Rich Cosner, president of Prudential California Realty.
Editor's Note: This article by Beth Braverman originally
The Fiscal Times.
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