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Where Flipping A Home Generates An 80% Profit

Tyler Durden's picture




 

Overnight, RealtyTrac released its latest home-flipping report. What it found is that while the latest housing bubble may have indeed popped, manifesting itself not only in a decline in flipping prices but also a tumble in flipping activity across the US as a percentage of all sales from 6.5% a year ago to just 3.7% in Q1, and down from 4.1% last quarter, flipping, where a home is purchased and subsequently sold again within six months, can still be massively profitable, leading to returns that would make the pimpliest 25-year-old, math PhD HFT-firm owner green with envy.

Among the core findings was that the average sales price of single family homes flipped in the first quarter was $55,574 higher than the average original purchase price. That gross profit provided flippers with an unadjusted ROI (return on investment) of 30 percent of the average original purchase price averaged out across the US. The average gross profit per flip a year ago was $51,805 for an unadjusted ROI of 28 percent. However, it is the range that is notable: the flip ROI ranged from -8%, or a loss of $10k on the property, to a gain of 80%, a whopping $144K!

What is just as notable is that while flipping across the US is moderating, in some states it is as high as 12% of all sales activity. And just as notable, in the first quarter a whopping 43% of all flipping sales were to an all-cash buyer - in other words, flipping to other flippers!

“Slowing home price appreciation early this year in many of the most popular flipping markets put some investors in danger of flying too close to the sun,” said Daren Blomquist, vice president at RealtyTrac. “But investors appear to have recalibrated their flipping strategy, accounting for the slower home price appreciation even if that means fewer flips."

This can be seen well on the chart below, which shows that while the average flipped price declined modestly to $239K across the US, the reason why the ROI surged is because the average purchase priced tumbled from roughly $240K to just $183K. What this means is that the flipping "sharks" are digging ever deeper into cheaper priced properties with hopes of holding to them then selling them, with or without renovations, to witless "dumber money."

Further breaking down the flipping trends by market, we see that buying just with an intention to sell is most dominant in Las Vegas, Phoenix, Miami, the Inland Empire and Los Angeles - all well known regions from the last housing bubble.

 

Some of the other high-level findings of the report:

  • Flips completed in the first quarter took an average of 101 days to complete, up from an average of 92 days in the previous quarter and up from an average of 79 days for flips completed in the first quarter of 2013.
  • Among metro areas with a population of at least 1 million and at least 25 single family homes flipped in the first quarter, those with the highest share of flips in the first quarter were New York (10.2 percent), Jacksonville, Fla., (10.0 percent), San Diego (7.1 percent), Las Vegas (6.7 percent) and Miami (5.9 percent).
  • Among metro areas with a population of at least 1 million and at least 25 single family homes flipped in the first quarter, those with the highest average gross ROI percentage on single family homes flipped in the first quarter were Pittsburgh (89 percent), Philadelphia (56 percent), Memphis (51 percent), Detroit (48 percent), and Seattle (48 percent).
  • Among those same major metros, those with the biggest increase from a year ago in home flipping as a share of all sales were San Antonio (up 52 percent), Nashville (up 50 percent), Indianapolis (up 47 percent), Austin (up 35 percent), Providence, R.I. (up 33 percent), and Oklahoma City (up 33 percent).
  • Other major markets with year-over-year increases in flipping as a share of all sales included Los Angeles (up 1 percent), Dallas (up 28 percent), Seattle (up 19 percent), Houston (up 29 percent), and Portland (up 2 percent).
  • Among major metros, those with the biggest decrease from a year ago in home flipping as a share of all sales were New Orleans (down 83 percent), Baltimore (down 81 percent), Minneapolis (down 80 percent), Richmond, Va. (down 80 percent), Detroit (down 76 percent), and Washington, D.C. (down 73 percent).
  • Other major metros with year-over-year decreases in flipping as a share of all sales included New York (down 37 percent), Phoenix (down 39 percent), Riverside-San Bernardino in Southern California (down 22 percent), Atlanta (down 57 percent), Chicago (down 29 percent) and Las Vegas (down 9 percent).
  • Among all metro areas nationwide those with the highest volume of flips in the first quarter were New York (1,791), Phoenix (894), Los Angeles (828), Miami (749), and Riverside-San Bernardino in Southern California (627).
  • 82 percent of all properties flipped in the first quarter were sold to owner-occupants; 18 percent to buyers with a different mailing address than the property.
  • 43 percent of all properties flipped in the first quarter were all-cash sales to the new buyer.
  • 58 percent of all properties flipped in the first quarter were 3-bedroom homes, 21 percent 4 bedroom homes and 17 percent 2-bedroom homes.

Which brings us to the topic of the headline: where exactly does flipping generate a whopping 80% return on one's investment - nearly a doubling of the money - in under six months? The answer is shown on the chart below.

That's right: the place that is most likely to generate a massive return for flipping activity also happens to be one of the poorest cities in the US: Washington D.C. A city which, however, in addition to the poor social element is also home to the political social element. One wonders just how much of those flips are paid for by corrupt politicians paying in all cash. All taxpayer cash that is.

As an added bonus, here is a ranking of states sorted by prevalency of flipping activity. The top place should not come as a surprise to anyone - after all, those foreign billionaire oligarchs have to launder their illegally obtained cash somehow.

 

Finally, and perhaps most curiously, is a chart showing the impact of "rehab" spending, i.e. renovation costs, on the flipping ROI. Curious, because it is quite obvious that some of the biggest returns take place in homes in which the flipper doesn't put in even one cent of additional work, allowing returns of nearly 1000%. Alternatively, investing as much as the entire purchase price in "rehabiliation activity" provides absolutely no assurance that one will generate a significant return.

Bottom line: all of the above is merely a function of Fed monetary generosity. Anyone jumping into the ranks of the flippers should be aware that this, too, party is ending and very soon the flipper ROI is set to crash to 0% if not negative. Only when that happens will the housing bubble be well and truly on its way to a full blown, ahem, collapse.

 

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Thu, 05/01/2014 - 14:42 | 4717081 onewayticket2
onewayticket2's picture

80%....that's nuthin'  try turning $1k into $100K on your first ever commodity trade.

 

Best, Hillary

Thu, 05/01/2014 - 14:57 | 4717128 localsavage
localsavage's picture

This is a total mess.  They even got to Schiller.  I saw him say that he advised his kid that it was an OK time to buy a house.

Thu, 05/01/2014 - 15:11 | 4717176 The Most Intere...
The Most Interesting Frog in the World's picture

Off camera Ben Bernanke had a 44 Magnum pointed at Schiller's head...

Thu, 05/01/2014 - 16:03 | 4717444 GrinandBearit
GrinandBearit's picture

Shiller = ivory tower FED/status quo shill.  He always was.

Thu, 05/01/2014 - 14:42 | 4717085 maskone909
maskone909's picture

who needs a casino when you can live in one.  the nightmare never ends.

Thu, 05/01/2014 - 15:04 | 4717151 McMolotov
McMolotov's picture

There's never been a better time to buy then immediately re-sell for profit to enormous morons!

Thu, 05/01/2014 - 14:44 | 4717092 10mm
10mm's picture

One day flipping trailers will be the shit.

Thu, 05/01/2014 - 14:44 | 4717096 Otto Zitte
Otto Zitte's picture

Flipping laundry

Thu, 05/01/2014 - 14:46 | 4717102 Its_the_economy...
Its_the_economy_stupid's picture

flip me another moldy one please, w extra special sauce.

 

Thu, 05/01/2014 - 15:02 | 4717146 Big Corked Boots
Big Corked Boots's picture

Bleach is your friend.

Thu, 05/01/2014 - 14:50 | 4717113 pupton
pupton's picture

I wonder if this includes properties recovered from tax sales and forclosures.

Thu, 05/01/2014 - 15:10 | 4717170 NOTaREALmerican
NOTaREALmerican's picture

I nice graph.   I wonder if the data going in is accurate. 

Here in SaCrAmEnTo, the epicenter of the last housing bubble, my fellow cubicle dwellers have stopped talking about the renewed housing price boom.     

Thu, 05/01/2014 - 15:26 | 4717258 NotApplicable
NotApplicable's picture

I don't understand how they can list any data for non-disclosure states. The only amount publicly listed in many of them is the amount of the promissory note. A note that doesn't exist in all-cash, flipper land.

Thu, 05/01/2014 - 15:53 | 4717404 Stuck on Zero
Stuck on Zero's picture

The data doesn't include the sweat equity.  If know a few flippers who put in 14 hour days for months on end to receive returns that yield about $30/hr.  And there is always the risk...

Thu, 05/01/2014 - 15:11 | 4717173 El Vaquero
El Vaquero's picture

If you want proof that humans are just big, dumb animals, here it is.

 

"Gee Bob, I know that flipping houses blew up in our faces in the past because we couldn't comprehend that something going up in price forever is kind of stupid, but why don't we do it again?"

 

 

Thu, 05/01/2014 - 15:19 | 4717218 oddjob
oddjob's picture

Shopping carts with granite countertops could be the next big seller.

Thu, 05/01/2014 - 15:35 | 4717306 ParkAveFlasher
ParkAveFlasher's picture

"Listen, I'm not taking out a mortgage on that Cadillac Escalade until you upgrade the dashboard to Corian, and that's my final offer."

Thu, 05/01/2014 - 15:20 | 4717227 mademesmile
mademesmile's picture

There is another reason. In order to get an FHA loan the property must not have more than $5000 worth of repair work. All the flippers are doing is going and fixing the minimum and then reselling it to people who can get FHA loans. It's almost impossible to buy a house that needs any repair work with an FHA loan. Most people don't have enough cash to finance an entire house - thus flippers are born.

Thu, 05/01/2014 - 15:31 | 4717285 NotApplicable
NotApplicable's picture

Thank you for this insightful post. Even though I knew about the FHA requirements, I hadn't put the two together.

From what I've heard from a realtor recently, making low-ball, all-cash bids on fedgov owned foreclosures that can't qualify for a new FHA loan is kind of a random, hit-and-miss process. Her advice to my uncle was to throw an offer out, and see if it sticks.

Thu, 05/01/2014 - 15:50 | 4717372 mademesmile
mademesmile's picture

I work for home inspection company that's pretty much how it goes get an average of about one out of 10.

Thu, 05/01/2014 - 15:26 | 4717254 J Pancreas
J Pancreas's picture

LOW & HD are loving this second wind! The greater fool theory absolutely amazes me seeing it all replay in SoCal and other areas. The average family just cant get a break in this cuntry.

Thu, 05/01/2014 - 15:36 | 4717312 Kirk2NCC1701
Kirk2NCC1701's picture

Don't kid yourself.  Most of the flippin flipping is done by RE Industry insiders*.  They get first dips on all the inventory and opportunities.

The one paying the tab in this Great Fool game, is the last buyer -- who will realize little to no margin.

* RE insiders: Select auction participants, Realtors, Title Agents, Lawyers, Developers, Property mgmt companies.  It's a network of various alliances that hunts/works together - like a pack.

Thu, 05/01/2014 - 15:46 | 4717366 ParkAveFlasher
ParkAveFlasher's picture

All those people that you mention, are people that I would like to live around, as neighbors, and have my children attend school with, and would pay extra to buy a house just to cavort with such fineness.   /sarc

Thu, 05/01/2014 - 15:38 | 4717323 DoctorOfLove
DoctorOfLove's picture

I guess Connecticut is not a state any more.

Thu, 05/01/2014 - 16:00 | 4717432 Seize Mars
Seize Mars's picture

It's a corrupt nightmare.
The state police make the Gestapo look like Barney Fife.
Home to the Sandy Hook Hoax. Crisis actors walking in circles, every one of the "victim" families purchased their homes for all cash and closed on Christmas Day prior.
The state Coroner allegedly examined all the alleged victims and was unable to answer basic questions ("what caliber were they shot with/I don't know")
The corrupt state legislature jammed through firearms regulation that is obviously unconstitutional bypassing the usual committee process, at night, soviet-style.
So, you know, there you have it.
Connecticut.

Thu, 05/01/2014 - 16:45 | 4717599 detached.amusement
detached.amusement's picture

they razed the place damn near immediately for a reason...it tends to get rid of any sort of after the fact forensic analysis.

 

they dont want people to remember that the first guys interviewed, yes you included, Lt Vance, said he had two handguns on him and they found a long gun in the car (but of course he didnt want to say what that was, so that the idiot MSMheads that showed up could suggest an AR-15 so that they finally have a good excuse to implement that "assault" weapons ban...and nevermind that they've redefined what an assault weapon is...)

 

 

 

yeah, curious that CT isnt on the list. 

Thu, 05/01/2014 - 15:39 | 4717335 DoctorOfLove
DoctorOfLove's picture

Actually none of the states in New England are states anymore.

Thu, 05/01/2014 - 16:47 | 4717612 detached.amusement
detached.amusement's picture

I figure once states like CT, CA, IL, NJ, become *that* bad that their "governments" no longer function, you'll just have the feds declare them to be territories, then they can just assume the entirety of the state employees and directly manage affairs instead of having those pesky state legislatures.  Not that the aforementioned states give the feds much problem outside of a mild fiscal headache.

Thu, 05/01/2014 - 18:41 | 4717966 Cthonic
Cthonic's picture

MLS PIN (prominent on east coast) might have different rules for third-party data sharing than NAR-controlled MLS services.

http://mlspin.com/about_mls_pin.aspx

Thu, 05/01/2014 - 16:19 | 4717506 Save_America1st
Save_America1st's picture

I'm not into flipping or anything like that.  But I am looking to bug outta Florida and head to the Great Western Redoubt areas.  Just need some land and a place to lay my head down, nothing fancy.

Anyone wanna invest with me in a mobile home park out west, saayyyy....the Idaho/Montana area maybe???  I'm lookin' to bug out that direction, and a nice, in good shape mobile home park can be a pretty good way to get some acreage and monthly income while "prepping" for the SHTF meltdown to finally hit.  I'm not kidding either...I'm seriously looking out there and an investment partner would be cool with me to split things with.  I'm ready to bug outta Florida...like, yesterday!  Let me know. 

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