More and more people are flipping homes — more than at any time in the past decade — but the rewards they're getting are shrinking. A combination of rising home prices, fierce competition and a slim number of available homes makes the popular trade riskier than ever.
More than 207,000 homes were resold in 2017, according to a new report from Atom Data Solutions, which defines a resale as a property bought and sold in the same 12-month period. This is the highest number of resales in the past decade. The number of individuals or businesses that resold a home also hit a decade high at 138,410.
But today's scalpers are very different from those of a decade ago, who made their deals using cheap, easily available money.
Taylor Denchfield has been flipping houses since she was 17 years old.
Source: Taylor Denchfield
“The surge in home resales over the past three years is built on more fundamentally sound foundations than the resale mania we witnessed a little more than a decade ago,” said Darren Blomquist, senior vice president at Atom Data Solutions. “While financing for resellers has become more readily available in recent years, 65% of resellers still purchased their homes with cash in 2017, a near reversal from 2004-2006, when 63% of resellers purchased their homes with financing.”
Today's flippers are making more gross profit in dollar terms because they're dealing with much higher home prices and profit margins, but they're putting more capital into their projects, which means their net profits are lower. The average gross profit margin on flips last year was 49.8%, down from 51.9% in 2016.
Taylor Denchfield has been flipping homes in Maryland since he was 17. Now 25, he's a veteran with a strict strategy for profit: His net profit is about 30 percent per project.
“Because I'm a real estate agent, I can buy and sell properties myself, which saves me on agent fees. Because I'm a builder, I have the in-house contractors and staff to complete everything from start to finish. I also have the connections to find off-market properties. The combination of these three allows me to make more profit than others,” he said.
Denchfield bought a small house in Silver Spring, Maryland, just outside Washington, D.C., last September. He spent about $80,000 on the home, and the gamble paid off: He sold the property in two weeks and expects to make a net profit of about $100,000.
“It has to be affordable enough, it has to be in a popular enough area and they have to know exactly what it takes to build it,” he said.
Mr. Denchfield has used leverage on some of his deals, and private financing for home flips is now a growing business. Fannie Mae guarantees up to 10 investor loans per reseller, but its underwriting standards remain so strict that resellers are increasingly turning to private lenders.
“There's more capital available now,” said Bobby Montagne, CEO of Walnut Street Finance, a Virginia-based private lender that specializes in investor lending. “People are seeing other people making money in this space, and we're going to see more people get in.”
Above: A new deck was added to the remodeled home.
But interest rates on these loans are significantly higher than the average rate for a typical home-resident buyer: Investors will pay an interest rate of 10 to 12 percent to a private lender, compared with the average 30-year fixed rate of 4.6 percent for a conventional mortgage.
“This is another factor that's really tightening margins,” Denchfield said.
House flipping has become more popular thanks to hit TV shows that make the process look dramatic and rewarding, but Denchfield warns that this is the exception, not the rule.
Today's housing market is increasingly expensive, and unlike the foreclosure crisis earlier this decade, there are historically few distressed homes for sale. Experienced flippers who can find properties not yet for sale are likely to fare better. Some sell through wholesalers, others through real estate connections.
There's also a supply crunch, especially at the lower end of the market where resellers typically make the highest profits. Multimillion-dollar homes are more available, but the risks are higher because of their higher investment prices.
Real estate resale returns vary by city. The cities with the highest average total returns last year were Scranton, Pennsylvania (168.2%), Pittsburgh (145.5%), Baton Rouge, Louisiana (122.9%) and Philadelphia (115.7%). Cleveland, New York, Baltimore and Buffalo also performed above average.
The cities with the highest resale rates were Memphis, Tennessee; Las Vegas; Tampa, Florida; Birmingham, Alabama; and Phoenix.