Gross Profits on Q2 House Flips Rise as Percentage of Total Flips Declines
By Brianna Bobola, Marketing Writer, B2R Finance
The average gross profit on a flipped house increased during the second quarter while the overall percentage of flips declined, according to RealtyTrac’s Q2 2015 U.S. Home Flipping Report.
The report detailed several trends of interest to investors, including an eight-year high in the time required to complete a flip, which now takes an average of 179 days.
Investors pulled in an average gross profit of $70,696 on each flip, up nearly 42 percent from the year-ago period, according to the report. The average gross profit is the difference between the purchase price and the flipped price. It doesn’t include renovation costs or other expenses.
“I think this ties back to interest rates, which dipped at the beginning of the year and gave a shot in the arm to the market,” said Daren Blomquist, vice president at RealtyTrac. “Lower FHA insurance premiums also helped attract first-time buyers, who are a target audience for home flippers,” he said.
The average gross return on investment (ROI) was 35.9 percent for completed flips in the second quarter — up from 23.4 percent from the year-ago period and from 35.6 percent in Q1. The average ROI is the average gross profit as a percentage of the average original purchase price.
The average gross ROI on flips reached a 10-year peak of 44.9 percent in Q2 2013 — a time period when distressed property was more plentiful.
The percentage of houses flipped dropped to 4.5 percent of all single-family sales (30,013 properties), down from 4.9 percent in the year-ago period and 5.5 percent in the previous quarter.
FLIPPING PROFITS STILL POSSIBLE
Despite the decrease in the percentage of properties being flipped, Blomquist, told B2R Finance that opportunities for substantial profits still exist for residential real estate investors.
“The good news for investors is that homebuilders are still being cautious about building new homes,” he said. “If you are providing a good product and not competing against new homes, there are still good opportunities if you are willing to go into second- and third-tier neighborhoods.”
These are neighborhoods investors may not have considered two or three years ago when the housing supply was more plentiful.
Investors should proceed with caution, however, as price appreciation is expected to wane in the coming months and housing experts expect mortgage rates to rise before year-end. These two factors combined, depending on severity, could reduce the pool of available homebuyers.
Flipping returns have already softened in some higher-priced markets, including San Francisco, Seattle, Denver and Los Angeles. Flips on low-end properties priced below $50,000, meanwhile, yielded negative returns in Q2.
MARKETS WITH GOOD POTENTIAL
Those markets where at least 50 flips occurred during Q2 continue to be some of the markets where significant amounts of distressed housing were available. They include Las Vegas and Fernley, Nev., multiple cities in Florida, Memphis, Tenn., and Bakersfield, Calif. These were also among the top 10 metro areas for flips’ share of total sales during Q2.
Chicago had the highest average gross ROI during Q2 — 61.2 percent — in markets where at least 50 flips occurred. Dayton, Ohio, was second with a 60.6 percent ROI, followed by Harrisburg, Pa. (60.6 percent), Ocala, Fla. (56.8 percent), and Baltimore (56.7 percent).
ZIP codes with less activity — at least 15 flips — also brought in some eye-popping returns. The best ROI was in the 32209 ZIP code in Jacksonville, Fla., where the average return on investment was a whopping 231.9 percent. That was followed by the 45424 ZIP code in Dayton, Ohio (189.5 percent); 21215 in Baltimore (163.5 percent); 63116 in St. Louis (161.1 percent); and 38127 in Memphis (141.4 percent).
The following metros — some of which have some of the nation’s highest priced houses — had the highest average gross profits in dollars: San Jose ($261,946), Los Angeles ($171,954), San Diego ($141,483), Washington, DC ($139, 927), and Seattle ($131,028).
LONG FLIP TIME
It now takes about six months, on average, to flip a house. Blomquist said flippers have struggled to move their product quickly. This longer turn time may be due, in part, to the buying up of “rougher” properties that require more work before they can be put back on the market.
FLIP PERCENTAGE TO FLATTEN
Blomquist expects the percentage of flips to begin to flatten and level out in coming quarters.
“We are now really close to the long term average for flipping,” Blomquist said. “If you go back to first quarter of 2000 it was 5.2 percent. I expect it to flatten out and not really drop too much more.”
The share of flipping peaked at 8 percent in the first quarter of 2006 when the nation was experiencing an overheated housing market.
House flipping is a market indicator that tells housing experts the general health of a housing market. Too much flipping typically means a market is overheated and too little indicates investors have lost confidence in the market.
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