Buying a home with the intention of reselling it at a profit in the near future made a lot of sense in 2005, when home values appreciated 20% nationwide. A couple of years later, as the real estate market collapsed and millions of owners found themselves underwater, house flipping didn’t seemed just risky, but stupid. Recently, however, with home prices on the rise and record low interest rates still in effect, this is a bet more investors are willing to take.
According to the Washington Post, flipping homes is booming business yet again:
The number of flips rose 25 percent during the first half of 2012 from the same period a year earlier, according to research firm RealtyTrac, and the gross profit on each property averaged $29,342.
First off, note that that’s gross profit—not factoring in any other costs incurred by the flipper, including rehab expenses and fees for realtors, lawyers, and inspectors. What truly matters to a flipper is net profit, and it’s unclear what that average is.
Profits are potentially higher in areas where homes cost more, but then again risk is higher as well. In Maryland and Virginia, where home prices tend to be higher than in most places around the country, the average gross profit for a flipped home has been about $55,000. (For RealtyTrac’s purposes, a flip is defined as a transaction in which a home is bought and resold within six months; the average time for flipping nationally is 106 days.)
The hottest markets for flipping include Phoenix, Las Vegas, Miami, and Atlanta. What these areas have in common is that they all suffered enormously during the Great Recession‘s real estate value collapse. Like most of the country, these spots have also been benefitting from steadily rising home prices, leading buyers to believe that the market has bottomed out and there’s money to be made—attracting more buyers in the process.
Flipping for a profit is far, far easier in an environment in which home prices are creeping upward, RealtyTrac Vice President Daren Blomquist explained to the Washington Post:
“There are flippers in any market, but a market where home prices are appreciating is much more forgiving for flippers than a market where prices are depreciating,” Blomquist said. “We have turned that corner in a lot of places in the last six months, so that’s going to attract flippers.”
The Chicago Tribune, meanwhile, reports that realty companies in and around the Second City have been offering trips for investors aboard a bus that might be called the “Foreclosure Express.” On a recent Sunday morning, a mix of newbie buyers, would-be landlords, and experienced house flippers hopped aboard the bus and toured multiple properties in foreclosure. The hope among realtors is that such a tour can generate interest in foreclosed homes, educate buyers on the ins and outs of investing in such properties, and also save everyone involved time.
Marki Lemons-Ryhal, a Chicago real estate agent for Keller Williams, said she’s hosted 15 such tours over the past few years, all preceded by an info seminar about buying foreclosures:
“Many buyers today have credit problems,” said Lemons-Ryhal. “So we start by helping them with that. In the meantime, the tour gives them realistic expectations. With these properties, you get what you get, and it’s not always move-in condition. One house may have a new kitchen but no furnace, for example. And, you have to be able to deal with delays beyond your control.”
Flippers will also have to deal with market forces beyond their control, and there’s no guaranteeing that home prices will keep rising in Chicago, Phoenix, or any other area.