Fewer people bought homes in 2014 to fix up and sell, or rent, but flipping houses remains profitable in certain markets.
House flipping usually involves buying a cheap property, removing outdated features, fixing any structural or mechanical problems and adding modern features, then selling it at a profit.
The practice became a popular way to invest in real estate due to the large number of distressed homes on the market following the financial crisis in 2008, but it dropped off in 2014, according to a report released last month by real estate research firm RealtyTrac.
The rise and fall of house flipping
The 136,269 single-family house flips in 2014 accounted for a mere 5.4 percent of home sales nationally, RealtyTrac says, accounting for the lowest numbers since 2011. The difficulty of finding cheap homes to flip caused the decline, according to RealtyTrac.
“Investors have picked much of the low-hanging fruit when it comes to home flipping over the past three years since home prices bottomed out in the first quarter of 2012,” RealtyTrac vice president Daren Blomquist says in the report.
Flipping, however, remains very profitable in some markets.
In Ohio, the Sandusky, Akron and Cincinnati metropolitan areas saw large returns on investment. In these markets, investors recouped what they paid for the property and raked in an additional 116.5, 71 and 70.6 percent, respectively, of the price in profits. However, those figures don’t factor in the out-of-pocket remodeling expenses. Chicago, Seattle, Atlanta, New York, Los Angeles and Denver rounded out the top 10 markets for house flipping.
Location, location, location
Blomquist says investors found the most reward last year when they made good predictions on risky locations. But that doesn’t always pan out.
Angi member John McCormick, a professor of political science and director of graduate studies at Indiana University-Purdue University Indianapolis, says he and his wife, Leanne, previously flipped two houses.
“I went to school for architecture, and that didn’t last very long,” McCormick says. “So maybe this is just the struggle of a frustrated architect.”
The Indianapolis residents flipped their first home in 2013 and sold it for $140,000, garnering a profit that McCormick didn’t wish to disclose. Although the second house sold for $400,000 in August 2014, he says they lost money.
The McCormicks hired the same contractors for the work, and went through the same steps to fix them up. What made the difference? Location played a huge factor, McCormick says.
With the first, a bungalow in Indianapolis’ busy Broad Ripple neighborhood, McCormick says he knew the area fairly well, and he researched selling prices for comparable homes. With the second, located in a sleepier Northside Indy neighborhood, it was more difficult to price, he says. Home appraisals rely on comparable properties in the area to determine a home’s value, but since no comparable properties existed, their improvements didn’t significantly increase its worth.
Even if you don’t touch a hammer, flipping houses is a lot of work, and it’s not for everyone, McCormick says. “You’ve got to have a good sense of the market,” McCormick says. “You’ve got to be able to take a risk, and take a loss if necessary.”
Understand scope of work when remodeling
When investors ask Joe Kincaid, owner of Kincaid Development in Riverside, California, to examine a property before they buy, he says the amount of work required surprises them. It takes more work than remodeling TV shows portray. About half of the investors decide not to buy, he says.
Some flips require extensive remodeling, while others need only minor tweaks. Amateur flippers can save money by painting or changing small features on their own, but they shouldn’t scrimp on electrical, plumbing and other specialized tasks that require licensing and permits, Kincaid says. Others, like McCormick, prefer to hire contractors for each step and just make the decisions.
Kincaid says he started flipping houses in 2007. He purchased an unfinished, million-dollar home after investors pulled out. When the housing market went south, he says it wouldn’t sell. The time on the market ate away his profits, he says, and soon, nothing remained.
“With the carrying cost of not selling the home in a timely manner, you lose money every month,” he says.
Since then, Kincaid says he’s flipped more than 100 houses, working for investors. He says most investors take out a loan to purchase the house, but they usually need to put down 10 percent and pay for labor and materials out of pocket. Most house flippers that Kincaid works with are flipping the home in order to rent it.
Kincaid advises against flipping homes if you can only manage a shoestring budget because remodelers should expect the unexpected.
“Always plan for a worst-case scenario,” he says. “Because everything above that is optimistic.”