Flips—defined as homes purchased by investors, rehabbed, and resold within 12 months—declined for the second straight quarter in Q3, according to a report out Thursday from real estate data firm ATTOM. And with home prices surging, flippers are also having trouble making the math work: Their profits are at the lowest levels in 13 years, ATTOM notes.
“The ideal environment for fix-and-flip investors is a market with high demand, low inventory, rapidly rising prices, and affordable financing,” says Rick Sharga, ATTOM’s vice president of market intelligence.
Flippers also benefit when there are lots of foreclosures, short sales, and other cheap properties they can remodel and resell.
“Today’s market has weakening demand, prices plateauing or falling, higher finance costs, and no distressed inventory at all,” adds Sharga.
ATTOM uses sales deed records for its report. The company calculates profits by taking the median sales price and subtracting how much speculators originally paid for these properties. The sum does not factor in rehab, permit, labor, and other miscellaneous costs.
It wasn’t purchase prices that made it harder for flippers to turn a profit, ATTOM data shows. It’s the sagging for-sale market. With mortgage rates more than double what they were a year ago, many buyers are staying on the sidelines instead of bidding up prices. That’s causing sellers to have to cut prices or homes sitting on the market for longer.
Nationwide, the gross profit on an average flip was $62,000 in the third quarter. That was a return on investment of just 25%—the lowest since 2009 in the Great Recession era.
Flipping is one pocket of the housing market that hasn’t been as heavily affected by the COVID-19 pandemic as others, Sharga notes.
“Markets where flipping comprises a relatively high percentage of home sales—Phoenix; Winston-Salem, NC; Atlanta; Spartanburg, SC; and Gainesville, GA—tend to be markets that have benefited from population and job growth over the past few years, which stimulates housing demand,” he says.
In the Phoenix metropolitan area, flips made up 13.7% of all home sales during the third quarter of the year. In Spartanburg, SC, they made up 13.3%, followed by Atlanta, at 12.9%; Winston-Salem, NC, at 12.7%; and Gainesville, GA, at 12.6%. For context, the metros with the smallest percentage of flips were Honolulu, at 1.6%, and Davenport, IA, at 3.7%.
In contrast, the metro areas where flippers are able to get the highest profit margins are those where home prices haven’t risen as fast. Think Buffalo, NY, where investors enjoyed a roughly 121.7% return on investment. It was followed by Pittsburgh, at 116.9%; Scranton, PA, at 88.7%; Reading, PA, at 86.7%; and Salisbury, MD, at 81.2%.
Flippers lost money in two markets, Jackson, MS, where flippers lost about 0.4%, and pricey Honolulu, at 0.3%.