The short answer? Yes, but that doesn't mean it can't be profitable.
Real estate investors have been successful in flipping homes for years, but recently the profit margins for home flippers have been shrinking.
According to ATTOM Data, approximately 95,000 homes were flipped in the third quarter of 2021, accounting for 5.7% of all sales. However, the average gross profit from a home flip in that quarter was just under $69,000, down 1.6% from the same period last year. Additionally, home flippers' return on investment fell to 32%, the lowest since early 2011 and a significant decrease from the previous year.
Why do home flippers go wrong?
There are a few possible reasons why home resales are currently sluggish. First, real estate prices are generally rising.
Home prices rose 18.5% year over year in the third quarter of 2021, according to the Federal Housing Finance Agency's home price index. Because flippers paid higher prices for properties in the first place, they may not be making the same profits they did when home prices were lower.
The cost of building materials is also rising, due in part to lingering supply-chain issues that have plagued the construction industry throughout the pandemic. It makes sense that home flippers are seeing lower profits if they're spending more on renovations.
Finally, labor costs have risen recently, partly because labor is harder to come by, which may also be contributing to the decline in profits in the home resale industry.
Does flipping a home still make sense?
Although home flippers may not be making as much money as they did a year ago, home flipping is still a profitable business.That said, if you want to get into the home flipping business, there are a few important things you need to do.
Find the right market: Ideally, you want a market that's low on inventory and not saturated with fix-it-and-flip investors. Know the area: You don't want to over-improve the home you're flipping, but you also don't want to leave out features that are common in the area and could significantly increase the selling price. Don't outsource too much: With labor costs at a premium, if you have the skills to do some of the work of flipping a home yourself, now is the time to get your hands dirty.
While the profits from flipping homes may be declining, there is still profit to be made, and if you're an experienced home flipper, you may be able to find considerable success even in these difficult times.
But if you're new to flipping homes or aren't sure if it's something you want to do, there are other ways to dip your toe into the world of real estate investing with less risk. Until home prices come down, building materials become more accessible, and labor becomes more readily available, you could consider options like investing in short-term rentals or investing in REITs (real estate investment trusts). While you'll have to contend with higher-than-average prices to buy a rental or income property, at least you'll avoid some of the risks and hassles that come with transforming a bad home into an attractive living space.