Profitable Fix and Flip Properties
How to Find Them in Today’s Market
by Gunnar Blix
With today’s record-low housing supply and unprecedented home-price growth, investors who fix and flip properties face a difficult challenge. Consumers, worried that housing affordability will soon be out of reach, want in on the market now, especially while interest rates are low. Bidding wars are prevalent on many properties—including fixer-uppers that used to primarily only interest investors.
As a result, it’s hard to find residential properties to flip—even distressed ones—at the prices needed for a healthy profit. Fix and flip investors are feeling the heat, with data showing that overall flip-sales rates are down.
In the current environment, where can investors still find viable properties to fix and flip? Beyond that, how can investors identify locations where properties are less likely to yield a profit? More than ever, data and analytics can play a crucial role in helping to inform investment questions and decisions. The right data can help identify markets that still offer opportunities as well as those that have stalled.
Using Black Knight’s comprehensive public-records deed information, and MLS data, we gleaned important insights about local-market flipping activity at the CBSA level. Our Home Price Index and automated valuation models (AVMs) added context to the analysis, for a deeper understanding of area price trends. While a manual search of this information would be daunting, Black Knight’s technology enabled us to analyze the data on a single platform and quickly generate the results in easy-to-read visuals.
How Prevalent is Flipping?
While overall flipping activity has decreased across the U.S., some locations are still experiencing relatively high flip-sales rates (defined as the ratio of flip sales to total of existing single-family residential and condominium sales). Flip sales ranged from being essentially non-existent in some markets to reaching above 15% of sales in other markets following the Great Recession.
Some of the markets currently experiencing the highest flip-sales rates are in the Western U.S., with the Phoenix metro area leading the way at 8.0%, followed by the Tucson metro area at 7.4%.
How Has Flipping Changed?
Over the last year, we experienced consistent declines in flip-sales rates across most of the largest U.S. metro areas. The map below shows the first quarter 2020 to 2021 year-to-year change in the flip sales rate by metro area, measured in basis points (hundredths of a percentage point).
Most areas are “in the red,” indicating slowing flip sales. There are noticeable declines along the California coast and in larger metro areas in the Northeast, including Boston, New York and Washington D.C., and along the east coast of Florida and Texas Gulf Coast.
There are also areas of flip-sales growth, indicated in green. For example, Flagstaff, Arizona, and Española, New Mexico are experiencing a surge in flips as the local markets see renewed interest, good inventories and strong price growth. Metro areas adjacent to Denver and Reno are benefitting from being on the fringes of second-home markets where inventories are tight.
We can get a sense of the potential to profit from flips by analyzing the delta between purchase and sales price. This represents the gross profits, and significantly overestimates the net profits investors realize. Investors incur not only the costs of needed updates, but buying, carrying and selling costs that can easily top $30,000 or more. Nevertheless, the gross return on investment (ROI) indicates how likely investors are to realize gains, and the change in the gross ROI confirms if markets are becoming more or less profitable. The trends clarify where profits may be going up, slowing down, or staying the same, and can help inform property-
purchase decisions.
The map below confirms that some markets where flipping became less prevalent last year—like Los Angeles, San Diego and Washington, D.C.—showed a drop in ROI. But this is not consistent across all markets. Denver, Miami, Atlanta and New York, where flipping decreased, are showing (at least weakly) improving ROI.
In other markets where flipping is increasing—such as Flagstaff—profits appear to be decreasing. Finally, a few smaller metro areas such as Madison, Wisconsin, are showing both an increase in flipping and ROI. Investors need more information than just the gross ROI growth of a market to make sound investments.
The sweet spot for flipping relies on several factors working together to create market opportunities. The market must support rising home prices to afford investors a high potential for profits, as indicated by rising home price trends. However, markets can become too hot or too tight for investors to buy at depressed prices, which is currently the case in many markets.
One factor correlating strongly with profitable flipping markets is the share of distressed real-estate sales, shown in the map below. Investors should keep an eye on MLS statistics, like average time on market and months’ supply of inventory to support the timing of their decisions.
Examples of Changing Markets
Two example markets may help illustrate the trends. Flipping in San Francisco boomed after the financial crisis on a glut of distressed inventory. For several years, flip-sales rates hovered in the teens, topping out at 15%. However, since 2013, flipping in San Francisco has declined as inventories dried up, home prices soared, and restrictions and lack of buildable land prevented new construction.
The Denver metro area saw a rise in flip rates following the financial crisis, but on a much more moderate scale. Flipping rates have largely held steady since, with the expected seasonal variations. Overall, the Denver market appears to leave room for profitable flips.
The Right Tools
Despite today’s housing supply and purchase prices, there are still locations where investors can purchase viable flips and likely turn a profit. More than ever, though, local market conditions need to be just right—and that’s where data and analytics can play a key role in informing decisions. With the right data and analytic tools, investors can easily discern local market trends and current conditions.
Fortunately, this type of data is readily available from technology and data companies that focus on the real estate and mortgage market to help flip-and-fix investors succeed.
