Flipping isn’t for the faint of heart. Witness the dramas faced by Jeff Lewis on “Flipping Out,” where high-ticket fixes and luxury-market dynamics make for nail-biting deal closings in LA. Or consider novice investors’ reality checks as they peel back plaster and learn just how much time or money their flip will really require before it’s market-ready. You quickly realize that successfully purchasing, rehabbing and selling a home requires impeccable timing, a conservative rehab/construction budget and a location where you can not only buy right but also sell right.
As founder and CEO of an online financing platform for flippers, I’ve witnessed first hand the changing dynamics of the house flipping market both pre- and post recession. Prior to the Great Recession, a combination of lax lending standards and rising home prices made flipping a recreational sport. What followed was a major economic correction and foreclosure crisis accompanied by home price drops in most markets. In a post-recessionary world, with less free-floating capital and tighter lending standards, flipping is now much more of a boutique activity. But one that has been gaining steam across the country as more renters are looking for move in ready homes and the housing market continues to recover (home prices have risen by 17% in the two years ending in December 2014 according to RealtyTrac).
Accordingly, although in 2014, some 136,269 or about 5.4% of all single-family home sales were flips-the lowest percentage since 2011-we can expect this number to continue to rise as the economy continues to recover and lending standards begin to loosen. Also, although volume is down, gross profits on flips are up to $65,993 in 2014 from $65,285 the year prior.
Top Markets for Flipping
The rules for successful flipping haven’t changed: Investors must know their local market. They need to buy right (i.e., low), price rehab costs conservatively and correctly, and choose the right comps in order to accurately predict exit timing and price. But whereas immediately after the recession flips (and thus flippers) were rampant in more prominent markets like Las Vegas, Los Angeles and the San Francisco Bay Area, today, with prices having returned to pre-recession levels in these markets, successful flippers are instead turning to alternative markets where volume is greater and prospective returns are higher. These markets include Memphis, Detroit, and Florida communities such as Ocala, Tampa, or Miami—all of which are among the most active and rewarding markets for flippers. With plenty of distressed inventory, affordable entry points, and buyer demand, flippers in these cities are fixing and flipping for record profits.
Here’s a look at what’s driving these markets:
Memphis
In Memphis, which according to RealtyTrac leads the pack in terms of home flipping volume and is 9th in terms of flipping returns, 10.6% of all home sales were flips during first quarter 2015 and return on investment averaged 54.8%. The Memphis market peaked in March 2007, when median home prices hit $89,100, according to Zillow. However, today’s median home price is just $67,500, which leaves plenty of opportunity for flippers to “buy right”. And with a continued increase in home prices, a drop in foreclosure activity and increased lending and purchasing activity, Memphis has all of the factors that make it attractive to homebuyers and flippers alike.
Florida: Ocala, Tampa and Miami
Florida home values have risen by 7.5% over the last year and many markets here just marked their 40th consecutive month of price increase. But with home values still 30% below peak prices, there is still opportunity to buy right as home prices continue to appreciate. Coupled with rising employment rates and increased lending and purchasing activity, Florida will continue to see increased demand from financially secure buyers that are looking for move-in ready homes that can be supplied by savvy flippers.
In Ocala, 2nd in terms of flipping volume and 3rd for flipping returns according to RealtyTrac, flips accounted for 8% of all sales and generated a 73.9% return on investment. Ocala median home values peaked at $173,000 in 2006, according to Zillow, but are now only about $98,400--and that’s coming off a year when the market rose 9.7%. Zillow predicts median value will rise 4.9% between now and mid-2016.
In Miami (3rd for flipping volume according to RealtyTrac), flips accounted for 7.9% of all sales. The market’s median price peaked at $373,000 in 2007, but is now $283,000, according to Zillow, and that’s coming off a year where median values rose 3.9%. With prices still below the peak and non-distressed sales on the rise, Miami is ripe for flippers that can find value add opportunities that can be flipped to eager homebuyers.
In metro Tampa, 4th for flipping volume and 6th for flipping returns, flips accounted for 7.4% of all sales and delivered 57.2% ROI to investors, according to RealtyTrac. Coming off a year when home prices appreciated by 5.2%, the median home price is currently $141,000, still down from the 2006 peak of $210,000, according to Zillow. Tampa is also seeing a surge in millennial homebuyers with 65% of Tampa home purchases in 2013-2014 being purchased by a millennial homebuyer. Good news for flippers that can appeal to this emerging home buying demographic.
Detroit
Although Detroit has been shunned by the real estate community due to record foreclosures and a post-apocalyptic housing market, flippers should keep it on their radar as it has many of the same positive dynamics as Florida. Some 6.5% of all sales here were flips during first quarter of 2015, according to RealtyTrac, and investors partaking averaged a 58.3% return on investment. As if these numbers weren’t enough to convince the cautious home flipper, in Detroit home prices remain 20% or more below peak values, yet prices are appreciating by 10% annually.
This is partially due to the fact that move-in ready inventory here is in short supply. Flippers who undertake rehab projects can take comfort in the knowledge that quality inventory here sells quickly—and that their efforts are helping breathe new life into blighted neighborhoods. Other economic factors also make Detroit attractive for home-buyers. Detroit’s unemployment rate dropped a full percentage point, to below 7%, between 2013 and 2014, and the University of Michigan predicts that the metro area will add 60,000 new jobs in 2015 and another 73,000 in 2016, always a positive sign for a housing market.
Going forward, the reality of underwater homeowners eager to sell and newly-employed buyer prospects eager to buy means that flippers who choose to buy in these below-peak markets before their ascent accelerates can realize profits while also re-shaping the inventory in these communities. And while the bank lending market has certainly tightened in post-recession times, new programs appealing to first time home buyers will continue to revive the appetite for move in ready homes made available by flippers.
