Homebuyers who have been struggling with unaffordable prices and lack of selection recently are not alone – home flippers also haven’t had much luck lately. According to ATTOM’s latest report released on Thursday, flips (i.e., homes purchased by investors, renovated, then sold within 12 months) have seen a decline for the 2nd consecutive quarter in Q3 this year. This goes to show that even experienced real estate professionals can find it difficult to navigate the current housing market effectively. As home prices spike, flippers are struggling to make their returns. In fact, according to ATTOM, they have experienced the lowest profits in over a decade. Rick Sharga of ATTOM’s Market Intelligence team expresses that “The ideal situation for fix-and-flip experts is one with tremendous demand, few properties on hand, and escalating costs while also having access to inexpensive financing options”.
Investors who specialize in renovating and reselling properties reap the rewards when there are numerous foreclosures, short sales, and other inexpensive dwellings available. According to Sharga,” Currently we have a market with weakening demand, flattening or decreasing prices, more expensive financing costs, and zero distressed inventory.”
ATTOM compiles its report using sales deed records to calculate the number of profits. Specifically, the median sales price is deducted from the original cost paid by speculators to reveal a gain – without taking into consideration any rehab expenses, permits, labor costs, and other miscellaneous charges that are accrued along the way.
In agreement with ATTOM data, it’s not the high purchase prices that are making flips less profitable, but rather a stagnant market. Mortgage rates have more than doubled in the last year and this has spread fear among potential buyers leading them to sit on their hands instead of bidding up prices. This causes sellers to reduce home values or leave homes sitting unsold for longer periods of time – both further eroding profits for flippers.
In the third quarter of 2020, flipping yielded a nationwide average profit of $62,000 and an ROI (return on investment) of 25%, which is the lowest since 2009’s Great Recession. However, flips are not as significantly impacted by COVID-19 in comparison to other housing market segments according to Sharga.
According to research conducted, markets with a notable percentage of home flipping sales – such as Phoenix, Winston-Salem (NC), Atlanta, Spartanburg (SC), and Gainesville (GA) – have benefited from the population growth and job creation in recent years that has ultimately strengthened housing demand.
The Phoenix metropolitan area had the highest percentage of house flips in Q3, with 13.7%. This was followed by Spartanburg SC at 13.3%, Atlanta at 12.9%, Winston-Salem NC at 12.7%, and Gainesville GA at 12.6%. On the other hand, Honolulu showcased only 1.6% flip sales while Davenport IA came last with 3.7%.
Meanwhile, flippers have been able to secure the highest profit margins in metro areas where home prices haven’t increased as drastically. Buffalo, New York tops this list with an impressive 121.7% return on investment for investors. Other cities near the top include Pittsburgh at 116.9%, Scranton (88.7%), Reading (86.7%), and Salisbury MD (81.2%). Flippers experienced losses in both the Jackson, MS, and Honolulu markets. The former saw a 0.4% drop while Honolulu reported a slightly lower decrease at 0.3%.
In conclusion, the current housing market has made it difficult for fix-and-flip investors to make their returns. Home prices have spiked, resulting in lower profits and ROI. Markets with higher percentages of house flips tend to benefit from population growth and job creation which strengthens the housing demand. Investors should be aware that while some markets are more profitable than others, they should pay close attention to the current market conditions before investing in a flip. Additionally, they should have access to inexpensive financing options to further their profits. With all of these factors taken into consideration, fix-and-flip investors can still make a sizeable return on their investments.
If you’re looking to find your next fix and flip, look no further than The Offer Company Marketplace. Click the banner below to start your search, or contact us at (602) 448-7377.
Follow us on Twitter