Real Estate Slowdown Spooks Investors: Where Flipping Is Slowing the Most
By Lance Lambert @ Realtor.com
January 15, 2019

Home flipping, never exactly an undertaking for the faint-hearted, is getting riskier. Again.

Sound familiar? Americans have long had a love affair with the seductive gamble of snagging cheap fixer-uppers, rehabbing ’em, then reselling fast, hopefully for a sweet, sweet profit. But this national obsession became a national nightmare during the housing crash, when swollen real estate portfolios of everyday folks—pumped up by low- or no-credit mortgages—became financial anvils, dragging many under water. As the market bounced back, so, finally, did flipping.

Now there’s a new factor raising stress levels and blood pressures anew: the current slowdown in the housing market, with prices actually starting to fall in some cities. If those prices drop too far, too fast, then flippers can lose value on homes even as they work to improve them. So the realtor.com® data team figured it was time to find out where home U.S. home flipping is up—and down—the most. This isn’t just important for would-be flippers; it’s also a critical factor in predicting where those key markets are heading.

So what did we find? The markets with the biggest drop in flips are those where prices are slowing down, such as larger coastal cities where costs got ahead of what buyers could afford. The places where flips up tend to be smaller, more affordable cities getting influxes of new residents. And perhaps most surprisingly, some of the areas where this sort of speculative real estate investment contributed most to the last bubble, like Las Vegas and Phoenix, are where flipping is booming yet again.

Here’s what’s not surprising: Over the past four years home-flipping profits have gradually shrunk, from returns of 42% over purchase prices down to 38%. And that drop is much bigger than it sounds because it doesn’t factor in renovation and remodeling costs—which can surpass 20% of the purchase price, and are rising in many places.  But even as returns shrink, the overall number of flips grew 3.5% in September compared with a year earlier, according to a realtor.com analysis of home sales.

Reality check: A slowing housing market alone won’t be enough to fully derail home flips. As it turns out, these rehabbed abodes can be catnip to price-sensitive millennials.

Millennials “want to move into a home that requires minimal work,” says Charles Tassell, chief operating officer at National Real Estate Investors Association. “A house that has already been rehabbed or flipped [and is priced lower than new construction] is really what they are looking for.”

To identify the housing markets where the number of home flips are up and down the most, we looked at home sales in the 200 largest metropolitan areas* for July, August, and September 2018 and compared them with the same period a year prior. We defined a home flip as any type of home bought and resold within a three- to 12-month period. We included only those that sold for more than the purchase price and excluded deals that ended in foreclosure.

Now let’s start by finding America’s flip-tastic meccas.

Excerpt

1. Raleigh, NC

Median home price: $340,000
Increase in home flips: 63.4%
Difference between purchase and sale prices: 32%

Homes in Raleigh
Homes in RaleighKenWiedemann/iStock

Full-time home flipper Uriah Dortch always does his research to determine how much he’s willing to bid on foreclosed properties before he arrives at the home auctions at local courthouses. But these days Dortch, who flipped more than 20 homes over the past year, is seeing lots of new faces at these auctions as more investors get into the game.

“My heart still races when they start, even after [having been to] hundreds of auctions,” Dortch says. “But competition really went crazy during bidding this year.”

Why is flipping so hot in Raleigh right now? The city’s strong economy and growing tech sector mean many amateurs have more cash on hand to invest.

And all these new flippers are bidding up prices. To find deals, big players like Dortch are moving onto more out-of-the-way neighborhoods. He’s now keen on Northeast Raleigh, where homes built in the 1960s and 1970s can sell at auction for under $150,000. But many folks will then spend tens of thousands of dollars more on repairs in the hope of selling the properties for between $275,000 to $320,000. It’s not a bad return—if everything goes right!

2. Charlotte, NC

Median home price: $323,300
Increase in home flips: 42.5%
Difference between purchase and sale prices: 36%

Home in Belmont
Home in Belmontrealtor.com

Honeywell, a Fortune 100 electronics manufacturer, announced in November that it is relocating its global headquarters from Morris Plains, NJ, to Charlotte. Relocations like this are bringing people to town who are looking to buy a move-in ready home. And that’s creating an opportunity for investors to go into up-and-coming Charlotte neighborhoods to snap up well-priced older homes that are less than picture-perfect.

New coffee shops and bars seem to be opening every place you look in Belmont, a suburban neighborhood that’s quickly changing as folks with more money start to move in. The flippers are keeping busy there; they’re predominantly buying older, one-story homes with small porches for under $200,000 and modernizing them. And the odds of a quick and profitable resale are in their favor.

3. Orlando, FL

Median home price: $300,000
Increase in home flips: 37.1%
Difference between purchase and sale prices: 41%

More and more people are being welcomed to Orlando
More and more people are being welcomed to Orlandoaphotostory/iStock

When folks pack their bags and head for Orlando these days, they aren’t just going to Disney World. In fact, only four metros in the country are seeing more folks moving in. Many of these new residents are coming from more expensive cities in the Northeast and don’t want to blow their money on a fancy, brand-new home. So they’re choosing renovated residences instead.

“If you want to be in the right school district with the right price without going over budget, then these renovated flip homes are what you want,” says local real estate agent Rose Kemp of Re/Max Town Centre. “They are move-in ready, and the closest thing to new construction that many [people] can afford.”

But as the ranks of local flippers continue to swell, their margins are going down. To keep profits up, the savviest flippers are looking about an hour outside of the city, in places such as Lake CountyOlder ranch houses in need of repairs go for under $150,000 and can later be sold for around $250,000. The homes here are minutes away from the county’s many lakes (hence the name), and attract loads of retirees.

4. Phoenix, AZ

Median home price: $330,000
Increase in home flips: 35.7%
Difference between purchase and sale prices: 36%

Phoenix, AZ
Phoenix, AZdszc/iStock

In raw numbers, there are more home flips in Phoenix than anywhere else in the nation. And it shows: There are scores of local real estate investment groups on Facebook and Meetup.com, and the place even inspired its own (short-lived) HGTV show, “Phoenix Flipped,” in 2017. So how can this huge flipping market keep growing? Well, with more folks and retirees moving in from higher-cost West Coast states, there’s high demand for remodeled homes.

To find deals, Phoenix flippers are busy cold-calling, mailing, and even going door to door to try to talk folks into selling them their homes. Rehabbers are snagging older homes that need a lot more work.

But newbie flippers need to understand flipping isn’t cheap. The costs here for hiring tradesmen for drywall, plumbing, or electrical work just keep going up. So flippers in the Phoenix market who know how to use a hammer have a big advantage.

5. Las Vegas, NV

Median home price: $320,000
Increase in home flips: 33.7%
Difference between purchase and sale prices: 38%

A flipping opportunity in Vegas
A flipping opportunity in Vegasrealtor.com

Las Vegas was one of the hardest-hit cities when the housing bubble burst more than a decade ago. Small-time flippers were taken to the cleaners when home prices tanked and mass foreclosures ensued. But with home prices in Vegas rebounding, more mom-and-pop investors are poking their head out of their shell again.

“The previous recession has had a huge influence. Everyone has that in the back of their mind,” says Bryan Kyle, a real estate agent and property manager at First Serve Realty in Las Vegas. Since last year, home prices are up nearly 12.3% year over year. That’s enough for some folks to forget about past losses.

Particularly appealing to investors is the eastern section of the city, where older houses in need of some sprucing up still go for under $150,000.

The rest of the top 10 metros seeing the biggest uptick in home flipping are Oklahoma City, OKHoustonProvidence, RIAtlanta; and Detroit.

OK, now let’s take a look at the cities where the fix-and-flip crowd is taking a breather.

Metros where flipping is down the most

For the rest of the top 10 cities visit Realtor.com

Lance Lambert is a data journalist for realtor.com. He previously wrote for Bloomberg Businessweek and the Chronicle of Higher Education.