House-Flipping Profits Reach an All-Time High During the Pandemic—Should You Get in the Game?
House flipping during a pandemic is either a brilliant idea, or one that can result in financial ruin.
Flipping houses always looks so cool on reality TV, and it’s no doubt that those shows, compressed into 60-minute segments, have contributed to the popularity of this real estate investing trend. In reality, flipping distressed properties can be exhilarating, but it can also result in a financial disaster.
So, is a global pandemic the right time to consider getting into the house-flipping business? Or is this the worst mistake you can make?
Home Flipping Rates Are Down
According to a new report by ATTOM Data Solutions, house flipping is both rising and falling, depending on which stats you’re looking at. For example, in just the third quarter of 2020 (the latest quarter for which data was available at the time of publication), 57,155 single-family homes and condos were flipped. This amounts to 5.1 percent of all home sales that quarter, according to the report.
That’s a lot of flipping, until you consider that in the second quarter of 2020, flips were 5.7 percent of all home sales. And in the third quarter of 2019, flips were 5.5 percent of all home sales.
This means that home flipping rates are down, and according to the report, this trend is consistent across more than 90 percent of local markets (148 out of 159 metropolitan areas).
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The largest quarterly decreases were in the following metro areas:
- Killen, Texas (-44.5 percent)
- Savannah, Ga. (-43 percent)
- York, Penn. (-42 percent)
- Greeley, Colo. (-41.5 percent)
- Springfield, Mass. (-39.8 percent)
Other cities with quarterly decreases—ranging from 39.1 to 37 percent—include Raleigh, N.C.; Atlanta; Kansas City, Mo.; San Diego; and Rochester, N.Y.
However, some areas actually saw an increase in home-flipping rates. The largest increases were in the following areas:
- Davenport, Iowa (+18.5 percent)
- Hilton Head, S.C. (+16.8 percent)
- Scranton, Penn. (+12.2 percent)
- Amarillo, Texas (+10.9 percent)
- Kalamazoo, Mich. (+7.7 percent)
House Flipping Returns Are On the Rise
While the rate of flips is decreasing, profits were actually high, according to the report. In the third quarter of 2020, flipped homes sold for a gross profit of $73,766, compared to $69,000 in the second quarter of 2020, and $61,800 in the third quarter of 2019. This is the highest return on investment since the first quarter of 2018, which saw a 48 percent ROI.
These profit margins were consistent across 104 out of the 159 metro areas analyzed. The largest profit margins were in the following areas:
- Brownsville, Texas (182.9 percent)
- Austin, Texas (176.4 percent)
- Waco, Texas (157.4 percent)
- Springfield, Mo. (145.3 percent)
- Savannah, Ga. (143.6 percent)
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Other cities with large annual profit margin increases—ranging from 74 to 54 percent—include Raleigh, N.C.; Phoenix; Kansas City, Mo.; and Las Vegas.
However, some areas saw declines in home-flipping investment returns. The largest declines were in the following areas:
- Corpus Christi, Texas (77 percent)
- Hilton Head, S.C. (72.9 percent)
- Boulder, Colo. (69.1 percent)
- Wilmington, N.C. (58.9 percent)
- South Bend, Ind. (54.1 percent)
Average Time to Flip Increases
The report also reveals that it’s taking longer to flip houses during the pandemic. In the third quarter of 2020, the average time to complete transactions was 192 days. In the second quarter of 2020, the average time was 184 days, and in the third quarter of 2019, it was only 184 days.
In fact, the third quarter 2020 average of 192 days was the longest average time in 17 years (since the third quarter of 2003).
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Why You Should Get in the Game
So, is this a good time to dip your toes into the house-flipping market? Henry Angeli III, owner of Henry Buys Homes in Jacksonville, Fla., believes that it’s a great time to be flipping houses. “There’s record-low inventory due to increased demand as a result of lowered mortgage interest rates,” he says. “Everyone is trying to capitalize on these lower rates as a result of increased buying power—especially in my market in Jacksonville.”
His enthusiasm is shared by Luke Smith, founder of We Buy Property In Kentucky, who believes that now is a better time than ever to get into the business. Smith also points to low inventory levels, resulting in a high demand. “Materials to complete a renovation are more expensive, as the prices have risen from supply chain deficiencies due to the pandemic, but property values are appreciating quickly,” Smith explains. “The strong demand has caused property values to trade at a record pace and higher price points, which is great for house flipping.”
Smith warns against overpaying to get into the house flipping market. “But otherwise, if you can easily manage a project, you can come out ahead.”
Why You Shouldn’t Get in the Game
Not everyone is so optimistic regarding the success of newbies in the house-flipping business, however. “There are ‘record profits’ right now because the market for homes has exploded due to COVID-19, and has grown exponentially past where the market was when today’s houses were first purchased,” says Ryan Serhant, a real-estate broker and costar on Bravo’s Million Dollar Listing New York. “But that delta won’t last,” he warns. “In the house-flipping business, you make money when you buy; do not get into the business today based on where houses are selling at—that’s the backwards way.”
Jonathan Faccone, managing member and founder of Halo HomeBuyers in Bridgewater, N.J., also expresses caution as it relates to newcomers. “Even though the overall real estate market is good right now and profit margins are larger than they have been, I would not recommend people to get in this business right now.” And he provides three reasons why:
1. It is extremely difficult to find good deals for new investors.
“The market is already saturated with many experienced investors looking for deals with the right profit margin in them.” Faccone says it’s incredibly hard for brand-new investors to compete unless they’re willing to pay more for the same house. “If you have to overpay in order to get into a project, you will be taking on more risk of losing money when all is said and done.”
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2. The pandemic is making it more difficult to renovate properties.
To make a profit, Faccone says the goal is always to be in and out of the project in the shortest time frame possible. “This will ensure you are maximizing your profit potential while alleviating other risks such as overspending on renovations or not hitting your projected sale price.” However, since townships are operating at a slow pace (and often with reduced staff), he says inspections, construction permits, etc., are taking longer to complete. “This is a problem because as project times increase, carry costs will increase which will decrease profits.” He says what’s even more dangerous is that the market can shift—and if that happens while you’re carrying a project, it could be disastrous.
3. It has become harder to analyze a good deal because of the pandemic.
“The key to flipping houses successfully is buying at the right price, which requires correctly evaluating a home to determine what it can sell for.” In a perfect environment, Faccone says it’s hard to evaluate the home’s ARV (after repair value), but says COVID-19 is causing prices to adjust quickly. “It is becoming hard to forecast exactly what the ARV will be when you are ready to put the home on the market, and it becomes more of a guessing game than a calculated investment decision.” He recommends waiting until the market stabilizes before jumping in.