Home prices rose by 10 percent in 2015. That means a phenomenon of the real estate industry gained speed too: Home flipping, buying a home in order to sell it at a profit in short order, is making a strong comeback. Flipping is at a 10-year high, so what does that mean for the market?
A 75 percent increase
When an investor purchases a house and sells it again within the same 12 months, the house is considered flipped. According to CNBC, nearly 180,000 condos and homes were flipped in 2015, and experts expect to see even more flips in 2016. Flipping increased by 75 percent last year and made up for a little over five percent of all home sales in 2015.
The appeal of flipping
When housing prices are low, the number of people flipping homes decreases, but when prices start to go up — as they did in 2015 — investors set out to make a quick buck renovating and repairing inexpensive homes. RealtyTrac recently reported that the average gross profit for a flipped home last year was $55,000. It seems like an easy way to make a living, but if the bottom of the housing market falls out, investors could be saddled with houses they can’t move. It’s happened before and could happen again, although things have changed over the past decade.
A different playing field
As TIME reports, lenders are more cautious these days than they were in 2005. A decade ago, the majority of flipped homes — 66 percent — were purchased with a mortgage. Last year, only 30 percent of homes purchased with the intent of flipping were purchased using a mortgage.
Daren Blomquist, senior vice president at RealtyTrac, told CNBC that “the data indicate that flippers in 2015 continued to operate within relatively conservative margins.” Rather than a housing market crash, investors run the risk of an ever more limited pool of prospective properties to flip. Builders have reduced the number of houses they build in a year, and they can’t keep up with home buyers’ demands these days.
Best neighborhoods for flipping homes
If you want to try your hand at home flipping, choose an area that’s well suited to the venture. By and large, the best flips can be had in New Haven, Connecticut; Pittsburgh, Pennsylvania; Cincinnati, Ohio; Philadelphia, Pennsylvania; and New Orleans, Louisiana. These cities yield a resale rate of up to 99 percent higher than the purchase price, at least in some instances.
If you’re serious about flipping, real estate brokerage firm Redfin has released a list of the top 10 neighborhoods from 28 markets for home flipping:
• Petworth, Washington, D.C.
• Mount Washington, Los Angeles, California
• Silverlake, Los Angeles, California
• Brookland, Washington, D.C.
• North Sunnyvale, San Jose, California
• Brightwood, Washington, D.C.
• Richmond, Portland, Oregon
• Del Ray, Alexandria, Virginia
• Ballard, Seattle, Washington
• Los Feliz, Los Angeles, California
Moving forward, expect to see even more home flipping this year, but beware, it’s not for the faint of heart. Home flipping works best if you put a lot of time and a significant amount of money into the venture. A cheap house is priced affordably for a reason. Experts warn that investors shouldn’t underestimate the likelihood of discovering surprise problems. It’s wise to set aside about 20 percent of the overall budget for these surprises, and some flippers have found even that isn’t enough to cover costs.
Consider what you’d like to do with the home before buying. Some of the best renovation projects are also the most costly, like finishing out a basement, tearing down or altering structural walls, moving a fireplace, or gutting a kitchen or bathroom. If you go into your home-flipping venture with your eyes open, you can reap some stunning profits. If not, you might be getting in over your head.
We’d love to hear about your experience flipping houses. Tell us about it in the comments below.
Megan Winkler is an author, historian, Neurosculpting® meditation coach, certified nutritional consultant and DIY diva. When she’s not writing or teaching a class, Megan can be found in the water, on a yoga mat, learning a new instrument or singing karaoke. Her passion for a healthy mind-body-spirit relationship motivates her to explore all the natural world has to offer.