Home flipping becomes more competitive and less profitable

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Rapidly growing prices in the housing market, along with low interest rates, are driving more and more investors to buy homes, renovate them quickly and sell them at a profit. But as home flips increase and investors expect increasing returns, profits decrease.

Almost 95,000 homes were returned in the third quarter of this year, an increase for the second consecutive quarter after the turnaround dropped dramatically in the first year of the pandemic. Flips accounted for 5.7% of all sales, according to ATTOM, a real estate database.

Still, the average gross margin on a flip was just under $ 69,000 in the third quarter, down 1.6% from the same period a year ago. Return on investment fell to 32%, the lowest return since the start of 2011. It was also down from a return of almost 44% during the same period last year, marking the most sharp annual decline since 2009, when the housing market was in crisis. .

A flip is defined as a house bought and sold within the same 12 month period. They are getting lower returns as house price increases have started to slow. When investors bought the houses, the prices went up much faster. The increase in resale prices was not as large as the increase in purchase prices, resulting in lower profit margins.

“Clearly, falling fortunes was not enough to push investors back into a typical scenario of 32% earnings before expenses on transactions that typically take five months on average,” said Todd Teta, chief product officer at ATTOM. “We’ll see over the next few months if the amount they can make on these quick turnarounds will still be enough to continue to draw them into the home turnaround business or start pushing them elsewhere.”

Investors made the biggest profits in Oklahoma City, Pittsburgh and Buffalo, New York. The lowest returns were recorded in Laredo, Texas; Boise, Idaho; and Portland, Oregon.

Daniel DiGiacomo has been knocking down homes in the Baltimore area for over a decade. This year, he said, has been particularly difficult. Delays in the supply chain were just the tip of the iceberg.

“The costs of holding the property longer, the costs of materials, the costs of labor, anything you can imagine that arises out of the rehabilitation process has cost something on top of what we paid for. expected, whether it was money or time, ”DiGiacomo said. , which estimates the costs are now around 30% higher than during the pre-pandemic period.

The Baltimore-area home that Daniel DiGiacomo returns

Steve Washington | CNBC

That’s why he’s now selling to investors rather than owner-occupiers. Investors will rent properties and rental properties do not need high end finishes. This allows DiGiacomo to save costs and increase profits.

“It was easier for us to shift gears and produce a rental quality product with materials that we could obtain locally instead of bringing a little more luxury products to the market,” he added. .

Even doing this, it has returned about half as many properties this year as it did last year, due to higher costs, difficulty finding unstable properties, and supply chain issues.

As for next year, if interest rates start to rise, as they should, the fins could pull out again. There’s also a lot less inventory available to return, and that doesn’t seem to be easing off.

Seasonally adjusted active listings in November hit an all-time low, falling 18% from the same month last year, according to Redfin. If stocks remain limited in the pre-spring market, the turnaround will be even more difficult and less profitable than it is now.


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