Profit margins on fixer-uppers decrease as flip sales increase
It’s not the most lucrative time to flip houses, but that’s not stopping investors from getting back in the game.
Profit margins on home flips in the second quarter of the year hit their lowest point since 2011, a time when the market had yet to fully recover from the Great Recession, according to a new report from Attom Data Solutions.
Home-flippers saw the typical return on their investment fall to less than 34 percent of the original purchase price. That’s nearly 4 percentage points lower than profit margins in the first three months of the year, and 7 percentage points lower than the same period the year before.
Todd Teta, Attom’s chief product officer, points out that these declining margins don’t necessarily mean that flipping has become a bad deal for investors.
“A 33 percent profit on a short-term investment remained pretty decent, even after renovation and holding expenses,” Teta said in the report. “But with a few more periods like the second quarter of this year, investors may need to reframe how they look at these deals.”
The slip in profit margins appeared to have a fairly straightforward cause. While home prices were rising quickly when these investors sold in the second quarter, they were rising at an even more rapid pace when they purchased the same homes.
Attom’s data shows that the median price of flipped homes in the second quarter rose almost 11 percent from the preceding period, and were up nearly 19 percent year over year. But at the time investors purchased the same properties, prices had just risen nearly 14 percent from the previous quarter, and 25 percent year over year.
Roughly 4.9 percent of all home sales were flipped properties in the second quarter, up from 3.5 percent the previous quarter, the data firm found.
But even with these gains, flips still comprised a relatively low share of the market. In the second quarter of 2020, 6.8 percent of all home sales were flips.
Half of homes that were flipped in the second quarter sold for more than $267,000. Of that median sale price, $67,000 was profit for the seller.
Flips represented a particularly large share of the home market in Savannah, Georgia; Fort Wayne, Indiana; and Canton, Ohio. In each of these metro areas, flips accounted for at least 9 percent of all home sales.
New York and California contained the several metro areas with the fewest flips as a percentage of all sales. In the California metros of San Jose and Bakersfield, roughly 2 percent of homes were flips. Similarly low rates were recorded in the New York metros of Albany and Rochester.
Despite the relatively small number of flips in San Jose, the area led the nation in profits from flipping. The typical gross profit on a flip in the San Jose area was $242,500 — the highest dollar value in the nation, according to Attom’s data.