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Home flipping profits surge, but so do the risks

Home flipping did not flop this past spring. It became a riskier, but more profitable business.

That is the conclusion of a new study by RealtyTrac that says total home flips declined in the second quarter by 4.9 percent compared to the same period a year ago. At the same time, flippers saw a huge gain in gross profits, aided by rising property values.

Just over 30,000 homes were flipped in the quarter, according to the firm, which defines flipping as buying and selling a home within 12 months. The average gross profit – or the sales amount above the original purchase price, excluding any renovations and other costs – was $70,696. That was up nearly 42 percent compared to the same quarter a year ago.  

Daren Blomquist, vice president of RealtyTrac, said despite solid gains in profits, flippers should  proceed with caution. That’s because prices may cool off and interest rates could rise. He also said there are fewer foreclosures and other deals in markets where prices have been rising. Flippers are now going into riskier markets to chase profits, he said.

“Flipping is not always profitable, as evidenced by the fact that flips on low-end homes priced below $50,000 actually yielded negative returns in the second quarter,” he said.

Hard-money lender Yanni Raz said the good fix-and-flip deals have largely dried up in the Los Angeles area, where his company, HML Investments, is based. Investors are more likely to tear down old properties in desirable areas, he said, and build new houses.

“In 2009 and 2010, flippers could find deals no problem, just remodel them, put 30 or 40 grand into it and make some profit,” Raz said.  “Today it is not possible.”

Tom Zeeb, a home flipper who gives coaching seminars across the country, said opportunities can still be found, but flippers have to be smarter.

“That is a matter of getting educated and understanding what you are doing, not just think you are going to roll the dice and take your chances,” Zeeb said. On a scale of one to 10, however, Zeeb rated flipping opportunities high: “I would put us at a 7 and a half.”

Investors are still flipping

Flippers tend to finance their projects with cash or through hard-money lenders, but a few large funds bankrolled by Wall Street are now providing commercial loans to investors in multiple properties.

“We are still seeing quite a bit of demand from investors who are not only doing fix-and-flip financing, but also buying homes, fixing them and then renting them out,” said Ryan McBride, chief operating officer for Colony American Finance, which provides short-term lines of credit and commercial loans to those who invest in multiple properties.

McBride said institutional investors have also tended to shift away from buying distressed properties and selling them quickly, in favor of chasing properties to turn into rentals. Investors haven’t entirely left the business of rehabbing and selling properties, however.

McBride said that fix-and-flip investors are now more likely to take more time and pour more money into projects – a fact that might explain why the gross profits, but not necessarily the net profits - have risen so steeply according to the RealtyTrac data.

“When we were at the peak of the crisis,  investors were much more focused on numbers because there is just so much more foreclosure inventory," McBride said. "They were doing more deals, they were doing [them] quicker, and probably putting in less rehab dollars.” 


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