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Soaring prices and low interest rates in the housing market have encouraged more investors to buy homes, renovate them quickly and then sell them for a profit. But as home resales have risen, returns have fallen even as investors hope for higher profits.
Nearly 95,000 homes were resold in the third quarter of this year, marking two consecutive quarters of increases after resales dropped dramatically during the first year of the pandemic. Resales accounted for 5.7% of all sales, according to real estate database ATTOM.
But the average gross profit from a property flip in the third quarter was just under $69,000, down 1.6% from the same period a year ago. Investment returns fell to 32%, the lowest rate of return since early 2011. They were also down from nearly 44% a year earlier, and the biggest annual decline since the housing market hit the crisis in 2009.
A flip is defined as a home that is bought and sold within the same 12-month period. As home price appreciation has started to slow, investors have been getting smaller returns. When investors purchased homes, prices were rising much faster. The increase in resale prices was not as large as the increase in purchase prices, which led to lower profit margins.
“In a typical scenario of 32% pre-expense margins with an average of five months to close, it's clear that the downturn hasn't been enough to scare investors away,” said Todd Teta, chief product officer at Atom. “The coming months will show whether the money investors can make from these quick recoveries is enough to keep them in the home flipping business or push them elsewhere.”
Investors made the biggest gains in Oklahoma City, Pittsburgh and Buffalo, New York. They made the least in Laredo, Texas, Boise, Idaho and Portland, Oregon.
Daniel DiGiacomo has been flipping homes in the Baltimore area for more than a decade, and he says this year has been especially tough, with supply chain delays just the tip of the iceberg.
“The cost of holding the property long-term, the cost of materials, the cost of labor, all the costs you can imagine that come from the renovation process, all ended up costing us more than we anticipated, whether it be money or time,” DiGiacomo said, estimating that costs are up about 30% compared to before the pandemic.
Daniel DiGiacomo resells Baltimore-area homes
Steve Washington | CNBC
So instead of selling to homeowners, he now sells to investors, who then rent the properties out, and rentals don't require high-end finishes, allowing DiGiacomo to save money and increase profits.
“It was easier for us to shift gears and make a rental-grade product using locally available materials rather than trying to market a slightly more premium type of product,” he added.
Still, rising costs, the difficulty of finding resold properties and supply chain issues have meant that the number of homes resold this year is only about half of what it was last year.
Looking ahead to next year, if interest rates start to rise as expected, flippers may retreat again. Also, available inventory has dwindled significantly and the situation is unlikely to improve.
According to Redfin, the seasonally adjusted number of available listings hit an all-time low in November, down 18% from the same month a year ago. If inventory remains so low in the pre-spring market, reselling will be even more difficult and less profitable than it is now.