Flipping properties during today's fragile housing recovery means staying one step ahead amid increasingly fierce competition. Foreclosures are drying up, and cash-filled hedge funds are still buying low-value properties to rent. For home flippers who buy and sell homes in the same calendar year, the take is getting smaller, but the profits can still be big.
“Investors are finding creative ways to pinpoint properties with resale potential in the off-market. And on the sales side, the surge in FHA buyers this year means investors have a larger pool of potential buyers, many of whom are first-time buyers looking for their first home,” said Darren Blomquist, vice president at RealtyTrac, a company that lists and analyzes foreclosure properties.
The percentage of homes resold nationwide in the third quarter of this year increased 18 percent compared to the same period last year, according to the latest RealtyTrac report. Gross profits increased slightly.
Doug Van Soest has been flipping real estate in California's Inland Empire region since 2008. He used to buy foreclosures from local real estate agents, but now he's using a new strategy.
“As those properties became fewer and fewer and the competition became more intense, it became harder and harder to find homes worth reselling. We started writing directly to homeowners to see if they were interested in selling,” said Van Soest, who flips 30 to 50 properties a year, most priced under $300,000.
He's using his real estate database and new real estate app to target a few different categories. He's started emailing smaller landlords who don't live near the homes they rent out, hoping they might be tired of property management and just want to get out. He's also targeting potential sellers who aren't on the market.
“These days, we're only mailing to regular homeowners. We're narrowing it down a bit, like not mailing to people who just bought their home within the last two or three years,” Van Soest said. “Usually we're looking for people who've been living there a long time. We like to mail to older homes because we're looking for homes that we can improve, homes that we can spend money on to add value.”
For sellers, he says, this is an attractive prospect: They can sell their home without paying a real estate agent's commission, without having to make repairs to make it showable, and without having to go through the arduous mortgage-dependent sales process that traditional sellers go through.
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“Let's sell it quickly and be done with it,” Van Soest said.
Over the past year, reselling has surpassed renting as the preferred strategy for investors, according to real estate auction company Auction.com. With homeownership rates at their lowest in half a century, investor demand for single-family rental homes has been very strong. But buyers are slowly returning, especially to lower-priced homes, making reselling more attractive.
“Rising prices and extremely limited inventory have created a nearly ideal environment for real estate investors looking to buy, renovate and flip properties, and that's exactly what's happening in today's market,” said Rick Sharga, executive vice president at Auction.com.
According to RealtyTrac, the average gross return on investment for home resales completed in the third quarter was 33.8 percent, up from 32.7 percent in the third quarter of 2014. Of course, some markets have higher returns than others. Baltimore, Tampa, Florida and Chicago take the top spots in gross return on resales. The largest shares of resales are in Nevada, Florida and Alabama.