It’s easy to flip over an investment that seems like a sure thing. And few things are as sure as an asset that can be flipped -- home flipping involves buying at a low price and selling quickly for a profit.
It’s a big reason why many homebuyers in 2016 became real estate flippers. In fact, home flipping was hotter last year than it’s been in 10 years.
However, flipping is not without its risks. Whether you aim to upgrade and list a fixer-upper for sale, or scout a bargain in a quickly rising market, it’s smart to do your homework, and know what you’re getting into before investing directly in real estate as a flipper.
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Highest Levels In A Decade
A fresh report by ATTOM Data Solutions found that home flipping in 2016 rose 3.1 percent vs. 2015. That’s the highest level seen in a decade.
Home flips last year actually accounted for 5.7 percent of all single-family home and condos sales in 2016. That’s up from 5.5 percent in 2015, marking a three-year high.
Keep in mind that these numbers are still below the peak seen in 2005. In that year, 338,207 single family homes and condos were flipped—equating to 8.2 percent of all sales.
Also, more flippers bought homes they flipped via financing instead of cash - 31.5 percent in 2016, an eight-year high. The median age and square footage of homes flipped was 37 years and 1,422.
What The Findings Mean
Daren Blomquist, senior vice president for ATTOM Data Solutions, says some of these findings surprised him.
“I am surprised to see the flipping trend continuing to ramp up so far into an ‘up’ real estate cycle. This is a cycle where many potential discounted buying opportunities have been milked out of the market,” he says.
“We saw a surge in home flipping back early in the housing recovery, around 2010 and 2011. But then the share of homes flipped began to decrease as home prices accelerated.
This was a rational response to market trends. By contrast, the recent upsurge in flipping over the last two years is more irrational in nature.”
New Flippers Need Financing
Blomquist thinks that earlier flipping surge was driven by larger, better-capitalized investors who probably used their own money to flip.
The flipping uptick of the last two years is likely driven by smaller, less experienced investors who are probably borrowing from lenders. Confidence in the market also may inspire them more than the availability of bargains.
“Today, we have a housing market starved for inventory and still on the upswing. Both elements are favorable to home flipping,” he says.
“With a dearth of new homes being built, home flippers have less competition and can provide the next best thing to a new home.”
A Favorable Forecast For Flippers
For now, the future looks bright for home flippers.
“As long as home prices continue to rise, flippers have a built-in cushion for their profits,” says Blomquist. “We’ll continue to see an increase in flipping as more capital flows toward that market chasing returns.”
There’s another factor in flippers’ favor. Homes they renovate are often more desirable than newly-built homes, says Blomquist. This is because they have addresses in established neighborhoods, close to urban amenities coveted by many young buyers, instead of far-off new subdivisions.
However, flipping could be a risky venture if interest rates rise quickly. These investments can also go south fast if you lack repair skills and real estate knowledge.
Do You Have What It Takes To Be A Home Flipper?
For these reasons, Blomquist insists the best flipper candidates are those who know a local market inside out as well as the true value of homes in that market.
“You or a team member should also be able to accurately predict rehab costs. And you need a financial cushion to weather unexpected expenses and survive a loss on a flip,” he says.
Be mindful that home flipping is an aggressive and active investing strategy that requires a lot of time, know-how and hard work.
“Buyers should count the cost, in terms of time and money, before jumping into a home flip,” Blomquist adds. “You should stay very conservative in your estimates of what the property will sell for down the road.
Also, remain very pessimistic in your estimates of how much rehab and other carrying costs will add up to.”
If you lack what it takes to flip, consider being a passive real estate investor. One such strategy is to buy and hold rental properties.
“Or, you can partner with an experienced home flipper. In this deal, you provide the capital but rely on the partner to offer the expertise and time needed for a successful flip,” says Blomquist.
Steps For Successful Flipping
If you’re determined to try the home flipping route, proceed with caution. Blomquist suggests a few best practices.
“First, buy at least 30 percent below the after-repair value of the property and stick to that religiously. Be willing to walk away from any deals where you can’t get that discount up front,” he says.
Likewise, avoid buying homes with foundation issues or other serious structural problems. But if you or a partner have the skills to fix those defects, these properties can present a great discount buying opportunity.
Next, invest in the area you know best: your own neighborhood. If you’re successful there, you can always branch out later. Stay away from neighborhoods where you don’t feel safe in the daytime.
“I know of investors who bought homes in parts of Chicago for a dollar,” Blomquist says. “They ending up abandoning the home flips, though, because they were robbed multiple times at gunpoint during the rehab process.
Keep Your Financing Options Open
Lastly, be flexible when it comes to financing a flip.
“To get an edge on other buyers, flippers often need to be ready to move very quickly on a property,” says Blomquist. “It’s certainly possible to use traditional financing.
But you will need to disclose that the property will be non-owner occupied, which may push the interest rate higher.”
Fortunately, there is an increasing number of non-traditional lenders available today to offer funding to flippers.
“They can be a great source of financing, providing short-term loans that are ideal for flippers and a rapid turnaround time for loan approval,” says Blomquist.
What Are Today’s Mortgage Rates?
Today's mortgage rates depend in part on how you plan to use the property. For investment property and extremely short-term financing, expect to pay more than someone financing a primary residence for the long term.
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