House flipping Is back, but is It profitable?
The supercharged housing market has made house flipping more popular than it’s been in years. But that doesn’t mean it’s become a more lucrative business.
Attom Data Solutions on Thursday reported that 323,465 single-family homes and condos were flipped in 2021, a 26 percent year-over-year increase and the largest number since the peak of the housing bubble in 2006.
The data firm’s latest report also found that the typical gross profit margin on a flipped-home sale has been in sharp decline, from 42 percent in 2020 down to 31 percent in 2021.
This drop was the fastest decline in profits on fixer uppers since 2005, and brings those margins to their lowest point since 2008, according to Attom’s report.
These gross margins only reflect the difference between the price of the initial purchase and that of the final sale. Flippers also incur costs repairing the home that can run between 20 percent and 33 percent of a property’s eventual sale value, investors told Attom’s team.
This means that a flipper’s net profits — the money the investor keeps after all elements of the flip are completed — is far lower than last year’s 31 percent reported margin from the purchase and sale alone.
Still, there’s some reason to think that recent declines in gross profits were offset by lower project expenses as a result of the fast-moving market.
For one thing, more flippers were able to purchase these fixer uppers with all-cash deals, which come with lower capital costs than a financed transaction, Attom’s Executive Vice President of Market Intelligence Rick Sharga said in the report.
For another, the typical flip took less time from the initial transaction to the final sale. That helps cut down on the costs of holding the property, and may point to flippers getting away with less intensive repair jobs, Sharga said.
“A lot of the mark-up on fix-and-flip properties historically has come from the value of those repairs,” Sharga said, “but so have a lot of the costs that reduce net profits.”
Even as the number of house-flipping transactions rose, its share among all home sales declined to 5.5 percent in 2021. The year before, 5.8 percent of sales involved flipped properties.
But that share rose significantly as the year went on. In the last three months of the year, there were nearly 97,000 home flips, amounting to 6.8 percent of all home sales in that time.
The share of home-flippers who purchased with cash rose from 57 percent in the fourth quarter of 2020 up to 63 percent in the same months of 2021.
The time it took to execute a flip was also in decline. In the fourth quarter of 2020, the typical flip was a nearly six-month project. By the fourth quarter of 2021, the length of the typical flip dropped to roughly five months.