In today’s extremely competitive housing market, it’s very difficult to find a home that you can buy cheap and resell, but those who can do it will reap huge profits.
Although home resale activity overall declined in the third quarter of this year, total revenues for resellers soared to their highest level in the past 20 years, according to a new report from ATTOM Data Solutions Inc. The report found that the number of single-family homes and condominiums resold in the U.S. in the third quarter of 2020 was 57,155.
Flips are defined as homes that are bought and sold within the same 12-month period. These flips accounted for 5.1% of all home sales during the quarter, down from 6.7% in the second quarter of 2019 and 5.5% in the third quarter, according to the report.
The decline in activity is likely due to a severe shortage of homes for sale, especially at the lower end of the market that resellers favor.
According to the National Association of Realtors, sales of homes under $100,000 fell 22% in October from a year ago, while sales of homes priced between $100,000 and $250,000 were roughly flat. Meanwhile, sales of more expensive homes priced between $500,000 and $750,000 increased by more than 60%.
The national median price for a remodeled home in the third quarter was $240,000.
Although home resale rates declined during the period, gross profit from a typical resale — the difference between the average selling price and the average price paid by an investor — rose to $73,766 from $69,000 in the second quarter and $61,800 in the third quarter of last year, according to ATTOM.
This does not include any money the investor puts into repairs, renovations, etc. on the home before the sale.
Gross profits were the highest they have been since ATTOM began tracking this data in 2000. The increase in profits has boosted the typical return on investment to 44.4%.
Coronavirus pandemic boosts profits
ATTOM attributes the increase to the impact of the deadly coronavirus pandemic, which shut down much of the country and world in the spring and kept most people at home throughout 2020.
“This has all happened in the context of a pandemic, which has created unusual conditions for the housing market to boom, and the home flipping business is no exception,” said Todd Teta, chief product officer at Atom Data Solutions. “It's too uncertain whether recent trends will continue, but for now, home flipping leads continue to trend upward after a period when they were trending the other way.”
Profits from home flipping had declined in the years before the pandemic as home price appreciation had dwindled. Demand for housing rebounded sharply starting in May, fueled in part by pent-up demand from the early spring, when home sales all but halted. Demand then continued to grow as the stay-at-home culture created by the pandemic encouraged more people to seek bigger homes in the suburbs for work and school.
Record-low mortgage rates have created an abundance of buyers and increased competition for home flippers. About 57% of home flippers buy all-cash, but they can't always outbid those who use financing.
“Low interest rates and a lack of inventory have made it difficult to acquire resale properties, and the number of resale properties we currently have under management has fallen by 50 percent,” said Vipin Motwani, managing principal at Iron Gate Development in the Washington metropolitan area. “But at the same time, these two factors have also driven up home prices, which are 5 percent to 10 percent higher than we originally expected.”
Regionally, investors saw the highest annual increases in property resale profits in Raleigh, North Carolina; Phoenix, Kansas City, Missouri; and Las Vegas.
The cities with the lowest profit margins were Boulder, Colorado; Corpus Christi, Texas; Hilton Head, South Carolina; Reno, Nevada; and Killeen, Texas.
The cities with the highest gross profits from resales, measured in dollars, were San Jose, California at $290,000, Ventura, California at $180,000, Bridgeport, Connecticut at $177,500, Los Angeles at $161,500, and San Francisco at $158,500.
The lowest were Corpus Christi, Texas at $14,817, Hilton Head, South Carolina at $24,000, Killeen, Texas at $26,197, El Paso, Texas at $27,116 and Lubbock, Texas at $28,869.