Years after the trend fell out of fashion with home buyers, making a return to real estate markets is the trend of buying a fixer-upper, making some repairs and “flipping” to a new buyer quickly.
According to a new report from Trulia, more than 6 percent of home sales last year were “flips”. A flip is defined as the selling of a home at least twice within a year by the real estate data website.
Before the real estate bubble burst and the financial crisis of 2008, that’s the highest number in a decade. So could the housing market flip out again?
“When you see flipping reach ten-year highs, economists like us start to worry a little bit.” Trulia’s Chief Economist Ralph McLaughlin said in the TV interview.
“We think it’s a little bit different this time ,” McLaughlin added, “because we think more flips are actually value-added improvements that investors are making to the house, rather than speculative flips which is basically someone buying and sitting on a home waiting for the prices to rise.”
But home prices are rising like the mid 2000’s. “Price increases in 2016 were the quickest in about 3 to 4 years,” McLaughlin said, adding that gives flippers a potential layer of protection.
“If the flip doesn’t go according to plan, they at least made a little bit up in price gains in equity in the house.” McLaughlin added.
Up from 9.6 percent in 2015 and increasing to 10.5 percent of all home sales, Las Vegas had the most flipping activity, Trulia found. McLaughlin however said that investors are making improvement to the homes, Trulia also found. “We looked at the share of flips that actually had work done to them using building permit records and that is also near an all-time high.”
11.6 percent of flipped homes had acquired work permits, showed Trulia, citing data from BuildZoom. Permits for “big ticket items” like putting in a pool, or adding a bathroom are required in Las Vegas, McLaughlin said.
Three Florida cities, three Tennessee cities, plus Atlanta, GA are also included in the other flipping hot spots. Also making the top 10 were Fresno, CA and Tacoma, WA on the west coast.
Most of the flipping activity is among luxury properties, or “upper tier, this premium tier as we call it,” McLaughlin says.
While he said “there [are] opportunities across all spectrums, because the inventory of starter and trade-up homes has dropped the most, we don’t think there’s a lot of activity going on there.”
“Flipping is a risky business,” McLaughlin warned. “If you buy a home that needs a lot of work or you didn’t do due diligence you should have and there’s some big ticket items you didn’t anticipate maybe like a foundation that needs repair or new plumbing or new roofing , those things can take a lot of the profit margins off of that flip.”
Logistical risk and challenges that come with a flip are also highlighted by the report. To occur in the most efficient sequence, you have to time all your projects, McLaughlin said.
“If your drywall person is tripping over your floor person, which is preventing the plumbing person from coming in, that can add a lot of delays and costs to you,” the economist said.
“You really have to be like an orchestra conductor, you have to bring all the instruments together at one time,” he added
(Adapted from CNBC)