Home flipping is still hot. Need proof? Just turn on HGTV—chances are there’s a show about flippers on right now, adding fresh paint and shiny new appliances to some home they bought on the cheap, hoping to rake in the profits at sale.
But as home prices across the nation continue to rise and the supply of lower-priced homes is drying up, some flippers are having to look for new places to find deals. And some of the emerging flipper hot spots aren’t where most folks would expect.
The market with the biggest increase in flippers last year was Buffalo, NY,
which saw a 34% surge, according to a recent report from real estate data firm ATTOM Data Solutions. (The report included only metros with at least 1 million people.
ATTOM looked at all single-family and condominium properties that were bought and then resold over a 12-month period. The firm included only 174 metropolitan areas where sufficient data were available.
The struggling upstate New York manufacturing town was followed by New York City, at 29%; Dallas, at 23%; Louisville, KY, at 22%; and Birmingham, AL, at 17%.
“These markets are not the primary markets that many people would think of [for] investing in real estate,” says Daren Blomquist, senior vice president at ATTOM. “They’re more off the beaten path, so there’s less competition from other investors and there’s more availability for deals.”
Meanwhile, there were fewer flips in places such as Miami, where it fell by about 14%, and Los Angeles and Seattle, which were down 2%, as home prices are too high for many investors to get in on the market and make good profits, he says.
That’s why more investors are seeking out places such as Buffalo. Most of the flippers in Buffalo are locals seeking to cash in on the area’s revitalization and the improving housing market, says Chris Naugle, president of FlipOut Academy, a Buffalo-area school for potential home flippers. The market is particularly appealing to investors because rents are often higher than mortgage payments.
The median home list price is $100,000 in the city, according to realtor.com® data.
“It’s an appealing market because the price points are low,” Naugle says. “It’s a lot easier for someone who wants to get started but doesn’t have millions of dollars or hundreds of thousands of dollars.”
But prices are rising and it’s becoming harder to get deals, he says. Still, rising prices also allow investors to rent out or sell their properties for more money.
Nationally, home flippers made record profits in 2017. More than 207,000 homes were bought, rehabbed, and then resold within a 12-month window last year, up 1% from 2016. That’s the most flips since 2006. (Flips made up about 5.9% of all single-family home and condo sales in 2017.)
Flippers made an average gross profit of $68,143 last year, up 5% from 2016. But this represented only the difference between the sale price and the resale price—and didn’t factor in the cost of repairs on the properties. Those other costs are estimated to be between 20% and 33% of the home’s value. It took an average of 182 days to complete the flips.
The returns on the initial investments were lower, about 49.8%, compared with the all-time high of 51.9% the previous year. That’s mainly due to the housing shortage leaving fewer lower-priced properties on the market that appeal to those planning to flip them.
But that’s still higher than the lead-up to the financial crisis from 2004 to 2006, when returns averaged about 31%, according to ATTOM.
“More people have confidence in the housing market and are willing to invest in it in the form of home flipping,”says Blomquist. But with prices rising and more investors competing for fewer, cheaper properties, he says, flippers will have to go farther afield to find profits in 2018.
The markets with the highest home-flipping rates were Memphis, TN, at 12.8%; Las Vegas, at 9.1%; Tampa, FL, at 9%; Birmingham, at 8.6%; and Phoenix, at 8.5%. (This is different from the markets seeing the biggest increases in flippers.) In one ZIP code in Memphis, 38116, flips made up 31.5% of all annual home sales.
“It’s flip central,” Blomquist says of Memphis. “It’s a market that yields good returns for home flippers because of the lower-priced properties available there.”
Most of the flippers in the city are buying homes, rehabbing them, renting them out, and then selling them to investors in the Northeast or on the West Coast, says Dan Butler, co-founder of Memphis-based CrestCore Realty, which rehabs properties for mom-and-pop investors and often manages the properties for those who rent them out.
Rentals are popular in the city as many residents can’t afford to buy or can’t qualify for a mortgage. The median household income in the city was just under $37,000 from 2012 to 2016, according to the U.S. Census Bureau.
But the lack of inexpensive homes on the market is beginning to affect local flippers.
“Everybody has to pay several thousand more for their properties,” Butler says. “People are going to have to shift their return on investment expectations by a couple of percentage points.”