Profits Rising For Home Flippers But Challenges Remain

By ERIN FLYNN JAY

As home flipping rates went up at the start of this year, profits kept improving for investors who buy and quickly resell homes.

Last month, ATTOM released its first-quarter 2024 U.S. Home Flipping Report, which showed that 67,817 single-family homes and condominiums in the United States were flipped in the first quarter. Those transactions represented 8.7% – or one of every 12 home sales nationwide – during the months running from January through March.

The latest data showed that home flippers typically earned a 30.2% gross profit before expenses on homes sold during the first quarter of this year, marking the third time in four quarters that margins increased following a six-year period of mostly uninterrupted declines.

Why did home flipping rates go up in almost 80% of the nation? ATTOM’s data suggests that some flippers may have been lured back into the business in 2024 amid a period of slowly rising profits following years of declines.

Rob Barber, ATTOM’s CEO, said after the typical gross flipping profit margin sank from about 50% in 2020 to 25% early last year, common investment returns started to rise again and were close to 30% by the middle of 2023.

“The renewed profit improvement showed that home flippers were finally timing the market better and turning things around, which may have attracted others back into the business,” Barber told The Mortgage Note.

However, Barber said typical profit margins remain well within a range that could easily be wiped out by carrying costs on home flips, which include mortgage payments, property taxes, and renovation expenses.

“Those factors should be kept in mind before declaring a long-term trend of rising fortunes or increased activity for the home flipping industry around the U.S.,” he said.

Why investors still face an uphill climb to clear significant profits after expenses remains somewhat of a mystery given other trends in the housing market, which include elevated profits for traditional sellers.

“While typical market-wide profit margins commonly ticked downward overall last year for all sellers as home-price increases eased up, returns more than doubled from the late 2010s in the 2020s,” said Barber. “The level was still near 60% in 2023. Yet the reverse was happening in general to home flippers during that time, suggesting that they were struggling to time the market in a way that let them buy low enough and sell high enough to turn significant profits.”

Forecasting this situation is challenging, especially given the declining profits for home flippers over the past five years compared to traditional sellers, but Barber said it’s reasonable to expect investment returns and flipping rates to continue rising this year.

“That’s because home prices in general shot back up during the spring home buying season (7% quarterly and 5% annually, based on our data) after a period of modest gains in 2023,” he said. “Amid a very tight supply of homes for sale and a strong economy, there is little reason to think they won’t rise again during the summer before easing during the usual market slowdown in the fall.”

The latest price trends, even taking into account the usual fall ease-up, should set up a scenario for another bump in profit margins for home flippers, assuming they were able to get good deals when prices weren’t spiking last year.

Rick Sharga, President & CEO of CJ Patrick Company, said home flipping had almost nowhere to go but up as the number of homes flipped has been in a steady decline since peaking in mid-2022, and even with this quarter’s increase is still near its lowest level in six years.

“Some market conditions do favor fixed-and-flip investors: there’s still relatively strong demand, especially for entry-level homes, and limited supply since many existing homeowners are locked in by today’s high mortgage rates and can’t afford to sell their homes,” Sharga said. “So, for flippers who can find homes to buy, fix, and sell, there’s a ready market of buyers. But whether this quarter is the beginning of a return to a more robust fix-and-flip market or just a modest improvement after several quarters of declining sales is something we’ll have to wait and see.”

In addition to mortgage payments, property taxes, and renovation expenses, a limited pool of skilled laborers often results in construction delays, which increase a flipper’s carrying costs. Insurance premiums have also skyrocketed recently, especially in states prone to extreme weather events like California, Florida, and Texas.

“The cost of financing has increased dramatically, with most bridge loans having interest rates above 10%,” said Sharga. “And acquisition costs also continue to increase, as home prices are up between 5-6% nationally compared to last year. Meanwhile, buyers can’t afford to pay top dollar for a flipped property, since they’re also burdened by today’s relatively high mortgage rates.”

Sharga predicts modest growth over the next few quarters — “nowhere near the volume of flips we saw in 2022, but a gradual recovery from last quarter’s bottom. Like the housing market overall, we’re likely to see a modest year-over-year increase in the number of sales and the prices of the flipped homes while the market resets at the ‘new normal’ of 7% mortgage rates.”

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