Home flipping — buying and then selling a house or condo within 12 months — is on the rise and at a two-year high. Although still not at the levels of 2006, the practice is seeing some sharp increases.
According to a RealtyTrac analysis, 6.6% of all single-family and condo sales in the first quarter of 2016 were flips. That's up 20% from the previous quarter and 3% year over year. And the number of flippers grew by 8% from the first quarter of 2015.
Flipping as a percentage of all sales reached an all-time high in the following markets:
- Baltimore, Maryland
- Buffalo, New York
- Huntsville, Alabama
- New Orleans, Louisiana
- York-Hanover, Pennsylvania
The return on investment, or the gross profit on the sale, was strong. Homes flipped in the first quarter saw an average gross profit of $58,520, a 10-year high. In some markets, flippers saw gross profits of 80% or more of the price they paid for homes:
- East Stroudsburg, Pennsylvania (212.1 percent)
- Reading, Pennsylvania (136.4 percent)
- Pittsburgh, Pennsylvania (126.8 percent)
- Flint, Michigan (105.8 percent)
- New Haven, Connecticut (104.8 percent)
- Philadelphia, Pennsylvania (103.7 percent)
- New Orleans, Louisiana (97.6 percent)
- Cincinnati, Ohio (88.5 percent)
- Buffalo, New York (85.1 percent)
- Cleveland, Ohio (83.8 percent)
- Jacksonville, Florida (81.8 percent)
- Baltimore, Maryland (80.8 percent)
The interest in flipping seems to have turned a corner. Between 2010 and 2014, flipping decreased annually. But in 2015, the percentage of homes flipped was 5.5%, up over 5.3% in 2014. The share of homes flipped was up in 75% of the metropolitan areas analyzed by RealtyTrac.
What's behind the increase?
RealtyTrac senior vice president Daren Blomquist saw several reasons for the increase, including greater confidence in the real estate market and more houses available after long foreclosure processes. But an important one is the growth of reality TV shows that make flipping seem an easy way to big money. "They believe that those reality shows actually have some truth to them," he told Fortune.
There is profit to be made, but the process is harder than a single episode shows. According to RealtyTrac, the average flip takes six months to complete and out of the gross profit come rehab expenses, marketing, real estate agent commissions, and other costs to upgrade and hold the home until it sells.
So far, flippers are largely acting rationally. "The majority are paying cash to buy the properties so they're not getting into debt and they're buying at a good discount, an average of 27% below market value," Blomquist said. There is also increased amounts of foreclosed properties finally being sold by banks, which creates more opportunity to improve a house or condo and make a profit.
Signs of overheating
However, some markets are showing signs of overheating. In San Antonio, Texas, flippers paid 8% above market for properties. Austin saw average purchase prices by flippers of 1% over market values. In Salt Lake City, Utah; Naples, Florida; Dallas, Texas; and San Jose, California, discounts were less than 10% under market values. "That's a bad sign that the flippers are not sticking to the fundamental flipping formula, which is to buy at a discount so you can create that margin for a profit," Blomquist said.
The country is going back to the days where everyone wants to be a real estate mogul. For example, a Michigan lottery winner recently said she'd use her $1.1 million check to invest in her home flipping business.
But there are practical implications for the average buyer as well. Some insiders say that flipping is driving up prices in various markets. In Austin, the number of home sales rose 5.1% in April. Steven Bilyeu, owner and president of Realty Group of Austin, told the Austin American Statesman that home flipping was "driving up all the prices."