House flipping might be risky, but it can also be highly profitable. According to a new report by CNBC, however, house flippers need to get smarter — the margins for flippers are smaller, and it’s led to a much larger group of high-end house flippers, at least for now.
“Flippers no longer have the luxury of 20 to 30% annual price gains to pad their profits,” explains Daren Blomquist, the VP of RealtyTrac, a real estate information website. “As the market softens, successful flippers will need to focus on finding properties that they can buy at a discount and efficiently add value to.”
Consequently, many home-flippers have been looking toward high-end neighborhoods. Not only do these homes have greater potential for adding value, but they are also being bought by less penny-pinching investors. Real estate agent Christal Goetz bought a $535,000 home that was fairly run down on the inside. She and her husband then spent $250,000 on renovating it. They were then able to sell the home for $925,000 — gaining them $140,000.
“Overall there has been more competition in the lower price points with newer investors and other larger companies or even mom and pop shops that are buying lower end properties as rental properties,” says Justin Williams, Founder and Host HouseFlippingHQ.com. “
Although stories like Goetz’s are not uncommon in today’s flipping world, the overall industry has shrank in response to the smaller available margins that come with average homes. Flippers now account for 4.6% of U.S. single-family home sales, which is down from 6.2% in 2013. The average return is 21%, compared to 31% at its peak a year ago.
Many would-be flippers don’t have the capital available to try and flip a pricier home. As one online commentator on aptly summarized regarding the current situation, “When it comes to the housing market in the US, the high end is hot, hot, hot… and the mid-tier is not, not, not.”
Although there’s no real secret to house flipping, most experts advise that the basics are still best — it’s important to get the property at a great price, in a great location, and equally important to spent enough money on the renovation. Right now, the cities with the best return on home flipping include Pittsburgh (106%), New Orleans (76%) and Baltimore (73%).