Trulia.com recently released a report questioning if flipping houses is a declining activity because home prices aren’t appreciating fast enough to provide enough profit in flips. A quote or two early in the article give us a better picture of what I think they really are measuring, which is more amateur flipping than professional activity.
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Trulia Asks: “Are We Past the Flipping Point?”
1. Trulia Asks: “Are We Past the Flipping Point?”
Trulia.com recently released a report questioning if flipping houses is a declining activity
because home prices aren’t appreciating fast enough to provide enough profit in flips. A quote
or two early in the article give us a better picture of what I think they really are measuring, which
is more amateur flipping than professional activity.
Selling houses at a premium generally requires price growth. The more prices are rising, the
more profitable it is to flip. Thus, when prices are rising faster, flippers have greater opportunity
to come out ahead.
AND
To tease out how price increases affect flipping activity, we focus exclusively on non-distressed
sales—transactions not involving foreclosures or short sales—of homes that had last sold within
the previous 12 months.
2. Sure, professional repeat flippers buy homes with the goal of fast price appreciation for a quick
profitable resale. But, the article is right in that the strategy doesn’t yield enough reward for the
risk unless prices are rising at a double-digit annual pace. When they are, a lot of first time
flippers enter the markets as well.
They focus on two sales of the same property within the previous twelve months. They also rule
out foreclosures or short sales, areas in which the more experienced flippers concentrate their
efforts. Without significant rehab, significant profits are not possible without rising prices.
With these factors in mind, it’s no problem to accept their basic premise. They grouped some
average flips between 2000 and 2014 by level of year-over-year price changes when the same
home sold. They found that the “flipping point,” when flipping activity picks up, was when
prices were rising by 10% or more year-over-year. Areas with this double-digit price increase
activity tended to have flipping activity between 4% and 7% of market activity. Areas with
single-digit price increases had rates of between 1% and 2% of the market.
I think that it’s a valuable study, and it should be a caution to investors or would-be investors
who want to make money flipping homes almost totally from rising prices. Every day you wait
for the price to rise to a profitable level is another day of risk. There is also added holding cost,
which is working against you, especially if you have short term financing involved.
The Pros are Still Very Active and Profitable
The most active flippers are those who do rehab, and they normally buy distressed properties, not
included in this Trulia study. They shop for short sales, foreclosures, and even estate sales to
locate discounts below current value. The less rehab that’s needed, the greater the necessary
discount. They don’t want to sit around holding the home hoping for price increases to bail them
out.
The more rehab needed, particularly with foreclosures needing a lot of work, the greater the
potential for short term profit. The goal is normally to have a buyer locked in even before the
project rehab is completed. And, they’re normally not requiring a rise in prices for their desire
margin, though it certainly helps.
The successful rehab flipper has these major profit contributors on their radar for every deal:
A purchase well below market value, even lower than it’s current value in current rough
condition. Lock in a profit even with a short flip without the necessary work. This is a
negotiation skill factor.
A project system that’s well-refined and the right material sources and contractors who
consistently perform on time and on budget.
If funding is necessary, its cost is factored into the project and profit markup applied.
Rehab work that can be performed at wholesale level with a markup that adds profit to
the project.
A buyer ready to buy at a price the flipper has factored for the desired profit margin.
3. This whole process is not at all considered in the Trulia study, as it is focused on flipping for
price appreciation. Good information, but those who are experienced at fix & flip, or those who
want to be, should move right past it. There isn’t a correlation. There is still plenty of
opportunity out there for the fix & flip investor. Of course, it doesn’t hurt if a project takes a
planned six months and the home’s ARV (After Repair Value), is a couple of percent higher than
when the project began.