House flipping has experienced a renaissance, but it may be coming to an end.
Photo: The Motley Fool
The rebound in the housing market has been dramatic with residential real estate prices climbing at a frenetic clip. The long lost art of house flipping -- the practice of buying distressed properties, sprucing them up, and selling them at healthy markups -- is back.
It might not last, however. Let's take a look at the few of the reasons why the house flipping craze may have run its course.
1. House flipping rate is cooling off
Industry tracker RealtyTrac reports that just 31,000 single-family homes were sold within 12 months of purchase during the second quarter. That accounted for just 4.6% of the number of homes sold in this country.
The number of houses flipped has suffered sequential declines for six consecutive quarters. Given how badly flippers were burned last time that greed got out of hand, do you really want to bet on the wrong side of momentum? House flipping activity has gone from accounting for 6.2% of all U.S. home sales a year ago to 5.9% during the first quarter of this year to 4.6% in the latest quarter.
2. House flipping isn't as profitable as it used to be
Speculators are still turning a profit if they buy the right properties, but the practice isn't as lucrative as it was late last year. RealtyTrac reports that the average gross profit on a flip was just over $46,000 last quarter, a 21% gross return on investment. That may sound decent, but keep in mind that average gross return on investment clocked in at 24% during the first quarter after peaking at 31% during last year's fourth quarter.
Oh, and before you start thinking that you can live with $46,000, keep in mind that this is the gross profit. It doesn't include the cost of renovations or of actually selling a home. Bargains are often fixer uppers so these expenditures can be substantial.
3. Homes are sitting on the market for a longer time
Time is the enemy of the house flipper. The longer the house sits on a market waiting for a second buyer the more it costs the flipper. Cash purchases by flippers tie up their capital, and house flippers financing the purchases -- a dicey proposition in this climate -- face mounting interest payments. All flippers also face the carrying costs that include taxes, insurance, and other maintenance overhead.
A year ago the average flipped home sale was completed in 135 days according to RealtyTrac. That has increased to 164 days during the first quarter and 187 days during the second quarter. Patience has become a costly virtue.
4. Luxury homes may no longer be a safe haven for house flippers
The most resilient niche for house flippers has been premium properties. The biggest year-over-year percentage increase -- and one of the few pricing categories to move higher -- came from homes priced at $750,000 or more.
One can argue that affluent home buyers are better able to absorb the spike in property prices, but the biggest bellwether we have on that front tells a different story. Toll Brothers (TOL 1.84%) is the leading publicly traded builder of luxury homes. The average price of a contracted home by Toll Brothers was a whopping $717,000. It reported quarterly results earlier this month, and it wasn't pretty. Revenue may have soared 53% on increasing prices and a 36% spurt in delivered properties, but the near-term outlook isn't as rosy.
Toll Brothers actually spooked investors with a year-over-year decline in the number of new contracts signed by the homebuilder. The cancellation rate also moved higher.
5. Don't miss the A&E froth signal
"Flip This House" began airing on A&E in 2005, just as the real estate market was heating up. The show followed professional house flippers as they went about scouring bargain properties and reselling them. By the time the market crashed three years later the shine was gone. "Flip This House" was nixed in 2009.
A&E came back to the house flipping well with "Flipping Vegas" a few years ago. The pilot aired in 2010, receiving the green light as a series in 2011. "Flipping Boston" followed in 2012 and "Flipping San Diego" in 2013. We saw how badly things ended a couple of years after "Flip This House". If this isn't a signal of things getting a bit frosty you may want to turn in your remote control.
There may still be some money out there to be made flipping properties, but you don't want to be the one left holding a title when the tide turns.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
The 70% rule helps home flippers determine the maximum price they should pay for an investment property. Basically, they should spend no more than 70% of the home's after-repair value minus the costs of renovating the property.
Why do house flippers fail? ›
Common mistakes made by novice real estate investors are underestimating the time or money that the project will require. Another error that house flippers make is overestimating their skills and knowledge. Patience and good judgment are especially important in a timing-based business like real estate investing.
What is the golden rule of flipping houses? ›
Many home flippers abide by the so-called golden rule for house flipping: the 70% rule, which says that you should pay no more than 70% of what you estimate the house's ARV (after-repair value) to be. You generally calculate ARV as the current property value plus the added value of any renovations you do.
How much does the average house flipper make a year? ›
While ZipRecruiter is seeing annual salaries as high as $119,000 and as low as $36,000, the majority of Real Estate Flipping salaries currently range between $64,500 (25th percentile) to $100,000 (75th percentile) with top earners (90th percentile) making $119,000 annually across the United States.
What is the average profit margin for flipping a house? ›
How much profit should you make on a flip? On average, a rehabber shoots for a 10 to 20% profit of the After Repair Value, but it varies depending on the market and the specific project risks. A 10% profit would be on the lower end, and a 20% profit would be considered a 'home-run' by most rehabber's standards.
How often do house flippers lose money? ›
Roughly one in five (20.8%) homes sold by flippers in March sold at a loss, higher than the 13.5% share for investors overall. For the purposes of this analysis, Redfin defines a flipper as an investor that bought a home and resold it within nine months.
What is the best state to flip houses in? ›
The Best (and Worst) States to Flip Houses
Louisiana is the best state for flipping houses in the U.S. with a score of 41.1 out of 50. This is largely due to the state's high house flipping ROI of 55.6%. Fixer-upper homes in this state are also priced reasonably at $196,763.
How do house flippers avoid taxes? ›
Here are three steps to take to help lower your tax bill as you start flipping houses.
- Form an LLC. Before you get into house flipping, it's smart to set your business up. ...
- Make Tax Deductions. As an LLC, you can write off many of your house-flipping business expenses. ...
- Deduct Capital Losses.
Is Flipping Houses a Good Idea? Yes, it is a good idea if you are thorough. On average, home flippers make a profit of 10%-20% of the after-repair value of the property.
What are red flags for house flipping? ›
Red flags that you — and your home inspector — should be on the lookout for include the following: Lack of documentation: Hybart recommends asking for a thorough paper trail of the project. “Ask for receipts and invoices for the repairs completed on the property,” she says.
Property flipping is a common practice in real estate. It involves buying a property and then reselling it for more money. Usually, when someone flips a property, he or she makes repairs and improvements beforehand. It can become illegal if the person falsely represents the condition and value of the property.
Why is flipping houses risky? ›
The Financial Risk: Understanding the Costs
Underestimating the renovation costs, unexpected expenses catching up, or holding onto a property for too long can swiftly turn a hopeful flip into a draining money pit.
Is house flipping still profitable in 2024? ›
However, with interest rates stabilizing and economic conditions improving, 2024 is a promising year for aspiring profitable house flippers. The potential for profitable property price shifts and a more favorable cost of borrowing contribute to the resurgence of house-flipping activity.
What is the average ROI on house flipping? ›
House-flipping gross profit and return on investment
The average return on investment (ROI) for house flipping in 2023 was 27.5%, and the average gross profit was $66,000, according to Attom. Popular as it is, house flipping has become less profitable over the past several years.
What is the 70% rule in house flipping? ›
Put simply, the 70 percent rule states that you shouldn't buy a distressed property for more than 70 percent of the home's after-repair value (ARV) — in other words, how much the house will likely sell for once fixed — minus the cost of repairs.
What is the rule of 70 formula? ›
The Rule of 70 Formula
Hence, the doubling time is simply 70 divided by the constant annual growth rate. For instance, consider a quantity that grows consistently at 5% annually. According to the Rule of 70, it will take 14 years (70/5) for the quantity to double.
What is the flip rule? ›
If you plan to purchase a flipped home with an FHA loan, you must abide by the FHA 90-day flipping rule. This rule states that a person selling a flipped home must own the home for more than 90 days before home buyers can purchase the property.
Can you make a living as a house flipper? ›
Consistent efforts and networking can help you make house flipping a full-time career. The average annual pay of a full-time house flipper in the US is $78,000 and can go as high as $127,000. However, there is no ceiling to how much you can earn on successful flips.
Can a house flipper do a 1031 exchange? ›
Flips can be lucrative and create a reward of a quick profit. However with most flips, you will be paying taxes at ordinary income tax rates. If your intent is for business or investment and you meet certain criteria, then your property may qualify for 1031 treatment.
