The real estate market for home flippers is faced with some challenges as higher costs and lower demands are putting a strain on the once popular house-flipping market. Following the housing crash, flippers began to pour in as they began purchasing distressed properties at bargain prices, fixing them up and flipping them either to residents or to other investors. While this worked for years, the math isn’t working out so well currently and some flippers are beginning to flee the market.
The number of home flips declined 18 percent nationally in August, compared to August 2017, according to Attom Data Solutions. Flipping volume continued to fall annually by double-digit percentages for three of the past six months.
“A competitive housing market with just trace amounts of distressed deals available is a challenge for home flippers because the traditional flipping model depends on a steep discount when the home flip is purchased,” said Daren Blomquist, senior vice president at Attom. “This year the disposition side of the home flip equation has also become more challenging, as rising mortgage rates have cooled off demand from first-time buyers and other financed buyers who flippers often sell their product to.”
Mark Bethanis, a contractor, has flipped Los Angeles-area homes for thirty years. He typically does multiple properties per year, however, he only completed one this year. “It’s not only becoming more expensive on the purchase side of flipping, but it’s becoming more expensive on the fix-up side of flipping,” said Bethanis.
Home prices are the highest in California, while flips decreased 22 percent annually. Home prices are continuing to increase and have been soaring for the past two years. Now, mortgage rates are rising, in addition to the cost for labor and materials.
Bethanis says he is able to use his own crews and even do some of the fix-up work himself, but for others, it is just getting too difficult, especially with competition now from large-scale flipping companies. “They have teams of people looking at properties, where the little guy, like myself, I have myself and my realtor contacts looking. A team can do more than an individual,” he added.
Real estate investing boomed after the housing crash due to so many low-priced properties available for sale. While some investors immediately flipped homes, other held onto these properties to rent them out. Now, the single-family rental business is booming, which adds even more to the competition for properties.
“The flipping industry has become professionalized,” said Ron Sitrin, a real estate agent with Long and Foster in Maryland. “It used to be contractors buying, fixing and selling one house at a time. Not very efficient. It’s now become a very organized business model with companies that have employees looking for deals, securing financing, managing the fix-up. These groups are much more effective and efficient at finding the deals out there and reselling them profitably.”
Attom reports that gross flipping returns in August fell to the lowest level in nearly seven years, while it is also taking much longer to sell a flipped home with an average 186 days – the longest since June 2006.
Flippers even have less to choose from as the national foreclosure rate is incredibly low and older homeowners, who would usually be downsizing now, are staying put at a higher rate than historical norms because costs are so high.”A lot of retired people are staying, even though the house doesn’t fit their needs anymore,” said Bethanis.