As the number of available foreclosure properties dwindle and home values improve, house flipping in the U.S. is on the decline.
Recent data from RealtyTrac shows only 31,000 single-family homes were flipped in the second quarter of 2014, making up just 4.6% of all home sales — down from 5.9% in the first quarter and 6.2% in the last quarter of 2013 (house flipping is defined as buying and then selling a home within 12 months).
Lower-end house flipping has seen the steepest decline. While sales of homes flipped for $750,000 or more increased by 21% this year, homes sold for less than $100,000 dropped by 5%, according to RealtyTrac.
Low-end house flippers played a crucial part of the housing recovery, says Ardell DellaLoggia, a Seattle real estate agent. In areas wracked with foreclosures , flippers swooped in to rehab homes that otherwise might have been left in disrepair. But with the inventory of distressed homes on the decline, there’s less opportunity for “mom and pop” flippers to invest. There’s also no guarantee they’ll net a solid return on their investment. Home flippers averaged a gross return of 21% this year, which is nothing to sniff at, but represents a 10% drop from one year ago, according to RealtyTrac.
“If you have enough flippers, you will not have those neighborhoods filled with [vacant homes],” DellaLoggia says. “For a [first-time home buyer] who would be thrilled to death to be able to afford a house that’s liveable, flippers are wonderful.”
For now at least, it will continue to be a high-end flipper’s market. But we tracked down some home flippers who are still sticking it out on the lower end of the market. They aren’t making massive profits and they don’t have tons of cash to throw around, but they’re still managing to make home flipping a worthwhile investment.
“Once you’re into it, it’s too late."
Beki Hastings, 37, and her husband, Josh, 38, have been flipping homes near their hometown of Heston, Kan., since the onset of the housing crisis. What they saw as a one-off smart investment opportunity has turned into much more than a side gig.
“It’s about taking something really horrible and ugly and making it into something beautiful and useful for someone else,” says Hastings, a stay-at-home mother. Her husband works for the city. “To see the buyers is so rewarding. They wouldn’t have had such a nice house in their budget before and we’ve been able to give them a great home in a budget they can afford,” she says.
For the couple, who has three children under the age of 14, learning how to renovate homes didn’t come easily at first. In a small town, they could rely on tips from their local bank when a home went into foreclosure. They found their first property in 2007 — a single-family home near their own home they got for a steal at $35,000. The couple took out a small construction loan to buy the property. To save as much money as possible, they decided not to hire a contractor and to do all the handiwork themselves.
“It was a big learning curve,” says Hastings. “We expected it to take four to six months, and it wound up taking 10 months.”
There was extensive termite damage, an expensive surprise that set them back several thousand dollars. Eventually, the house sold for $65,000, netting them about $10,000 in profit.
They’ve since rehabbed three more homes for twice the profit of their first. But as affordable properties became harder to find, they slowed down. Their last flip was in 2011. Since then, they took on a much smaller project — fixing up a dilapidated barn in their backyard.
“We took it apart board by board and built an entirely new barn,” and is now a successful wedding venue, she says.
When their friends ask them for advice about getting into flipping, Hastings says she’s hesitant to encourage them.
“I don’t think people understand how big of a time investment it is and how big of a strain it can be,” she says. “Once you’re into it, it’s too late. There’s always a point several months in where we swear this is the last house we’re doing and we’re never doing it again.”
Liz Haynsworth, 33, and her husband were among the wave of amateur home flippers who jumped at the opportunity to invest when home values tanked during the Great Recession. Both attorneys, the Dallas couple had long discussed ditching their day jobs to take on real estate investing full time.
In 2009, they took out a small loan and bought their first rehab project, a four-bedroom, 2.5-bath single-family home, for $240,000 — $100,000 under its original list price. After hiring a contractor, they spent five months gutting and remodeling the entire place, eventually sinking another $140,000 into the project. They eventually sold it for $395,000 — netting a modest profit of around 4% — but they were hooked.
“Once we bought our first flip, I decided I didn’t want to wait to jump in head first,” Haynsworth says. “So I quit my job.” Since then, they’ve flipped eight homes, all in the Dallas area, and have two more projects lined up. After the first investment, they decided to take on the contracting work themselves — dealing with construction crew, scheduling projects, managing the accounting — which has helped improve their profit margins greatly.
(Before and after shots of one of their latest projects)
“We have learned where you need to put your money to get the best return,” Haynsworth says. “In the beginning, we were putting crown molding in every room, doing more expensive appliances and things like that. Now we’ve learned that money is better spent on something like putting in new windows.”
Since each project takes several months to complete, they decided to get their real estate licenses and launch their own brokerage firm, which allows them to work from home. They also invested in a couple of rental properties, which adds a steady stream of income when they’re in between flips. Now that the housing market is cooling down, they can lean on work from their brokerage business and rental income.
“Some days are really slow and other days are crazy and we don’t get everything done,” she says. “This summer we’ve had three flips going plus two rental properties, and we just had a baby at the end of May.”
Whether the housing market is packed with cheap or distressed properties or not, flipping has inherent risks and isn’t for everyone, says Brendon DeSimone, a New York City real estate agent.
“To successfully flip and make money can be a full-time job,” he says. “You can't control the market and things happen during construction … There are so many moving parts that are not necessarily working in sync.”
Rick Newman contributed to this report.
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