Home flippers are fleeing the market as their profits shrink

A rough combination of higher costs and lower demand is putting a chill on the once red-hot house-flipping market. After the epic housing crash, flippers poured in, buying up distressed properties at bargain prices, fixing them up and flipping them either to residents or to other investors. That continued for years, but now the math isn’t working so well, and some flippers are fleeing.

The number of home flips, defined as a home bought and sold within the same 12-month period, fell 18 percent nationally in August, compared with August 2017, according to Attom Data Solutions. Flipping volume has been falling annually by double-digit percentages for three of the past six months.

“A competitive housing market with just trace amounts of distressed deals available is a challenge for home flippers because the traditional flipping model depends on a steep discount when the home flip is purchased,” said Daren Blomquist, senior vice president at Attom. “This year the disposition side of the home flip equation has also become more challenging, as rising mortgage rates have cooled off demand from first-time buyers and other financed buyers who flippers often sell their product to.”

Mark Bethanis, a contractor, has been flipping Los Angeles-area homes for 30 years. He usually does multiple properties per year, but this year he did just one.

“It’s not only becoming more expensive on the purchase side of flipping, but it’s becoming more expensive on the fix-up side of flipping,” said Bethanis.

In California, where home prices are highest, flips were down a steeper 22 percent annually.

Home prices have been soaring for the past two years, and now mortgage rates are rising. In addition, the cost for labor and materials is up, and the labor shortage is only exacerbating both costs and timelines.

Bethanis is able to use his own crews and even do some of the fix-up work himself, but for others, he says, it is just getting too difficult, especially with competition now from large-scale flipping companies.

After the housing crash, real estate investing boomed, thanks to so many low-priced properties available for sale. Some investors flipped homes immediately, while others held and rented the properties. The single-family rental business is now booming, and that only adds to the competition for properties.

“The flipping industry has become professionalized,” said Ron Sitrin, a real estate agent with Long and Foster in Maryland. “It used to be contractors buying, fixing and selling one house at a time. Not very efficient. It’s now become a very organized business model with companies that have employees looking for deals, securing financing, managing the fix-up. These groups are much more effective and efficient at finding the deals out there and reselling them profitably.”

Gross flipping returns in August fell to the lowest level in nearly seven years, according to Attom. It is also taking much longer to sell a flipped home, now an average 186 days, the longest since June 2006.

Flippers also have less to choose from. The national foreclosure rate is incredibly low, and older homeowners, who would usually be downsizing now, are staying put at a higher rate than historical norms because costs are so high.

“A lot of retired people are staying, even though the house doesn’t fit their needs anymore,” said Bethanis.

And demand from buyers is also waning. Mortgage rates are now about a full percentage point higher than they were a year ago, and some buyers are having to lower their sights. Flipped homes, which are usually renovated to turn-key condition, come at a price premium. More buyers today are looking for bargains, even if it means doing repairs themselves.