House flipping’s status as an aspirational American pastime took some hits during the recession but, like disco or SUVs, it has never gone extinct. On the contrary, it is back with a vengeance. Cable TV shows glorify expert flippers and infomercials flog seminars for novice investors eager to dive into this risky market.
Yet there is a catch. Homebuyers that dabble in flipping homes may vie against Wall St.-funded teams that turn over hundreds or even thousands of distressed properties in short periods.
Although many American housing markets are staging a recovery, there is a deep inventory of foreclosed or bank-owned properties that investors can tap into at below-market prices. And it is working: house flippers have grossed an impressive $29,342 on average for each property in the first half of this year, according to RealtyTrac, a leading supplier of foreclosure industry data. From purchase to sale, the average flipped home is turned around in just 106 days.
Wall Street-backed home flippers enjoy the advantage of scale and cash purchases, says Prof. Christopher Leinberger, head of the real estate program at George Washington University School of Business. That is particularly true in large housing markets such as Las Vegas or Phoenix that have a bounty of bank-owned residences. “I would think that a small player would have a better opportunity in a small town,” Leinberger says.
While small towns within large metropolitan statistical areas (MSAs) sport impressive gross profits, large housing markets such as New York City, Washington, D.C., and San Jose, Calif., boast the most profitable average flipped home sales.
Nearly two-thirds of the homes being flipped are sold to first-time homebuyers who seek a modest, 1,500 square-foot-size starter home — three bedrooms and two baths in a residential neighborhood, for example.
Once predominantly practiced in West Coast metropolitan areas such as Las Vegas, Phoenix and Los Angeles, house-flipping action is not restricted to those areas. Daren Blomquist, VP of RealtyTrac, says, “Investing seems to move from West to East and we’re seeing investors starting to move to East coast markets.”
When it comes to house flipping, of course, location matters greatly. “If you’re looking to do a lot of flips, I would avoid overly crowded markets,” advises Blomquist. “But if you’re looking to do a flip or two a year or if you’re getting into it as a hobby or make some income, my advice is stick to the market that you know well. There almost always will be a potential property and a prime opportunity that you can jump on it" when it becomes available.
24/7 Wall St. asked RealtyTrac for home flip data for the first six months of 2012 for the nation’s top 500 MSAs. We highlighted the 10 foreclosure centers where flippers are turning the highest average profits on sales of residential homes this year. We defined foreclosure centers as the best-known cities within metropolitan statistical areas that had an above-average number of house flips in the first half of 2012. We also excluded those markets with fewer than 205 flips in 2012, which was the national average. In addition to these RealtyTrac data, we included in our analysis home price change projections from Fiserv as of the first quarter of 2012. Additional home price data were collected from Trulia.
Following are the top five of the 10 best cities for flipping a house. (To see the remaining five, visit 24/7 Wall St.)
5. Omaha-Council Bluffs, Neb.-Iowa
> Avg. gross profit: $71,384
> Homes flipped through mid-2012: 253
> Avg. home price: $196,325 (115th highest)
> Avg. days to flip: 117
In the first half of 2012, house flipping more than doubled in volume in the greater Omaha region, compared to the same period in 2011. In that time, foreclosed housing inventory rose by nearly one-third. These flipped homes may be slowing a broader recovery in the local housing market because home prices have decreased by 20% on a year-over-year basis, according to Trulia data.
4. Washington-Arlington-Alexandria, D.C.-Va.-Md.-W. Va.
> Avg. gross profit: $72,297
> Homes flipped through mid-2012: 1,925
> Avg. home price: $370,919 (20th highest)
> Avg. days to flip: 110
Conditions are right for a boom year for house flippers in the Washington, D.C., area. First, there’s a decline in the available stock of foreclosed properties in the greater Washington, D.C., housing market, according to RealtyTrac data, which has strained the inventory of single-family homes for sale. Demand is rising for homes in the area, and sales volume is up by more than 22% compared to last year, according to Trulia.
3. Oxnard-Thousand Oaks-Ventura, Calif.
> Avg. gross profit: $78,106
> Homes flipped through mid-2012: 535
> Avg. home price: $416,790 (14th highest)
> Avg. days to flip: 112
In an area where one in every 62 homes is in foreclosure, news of a decrease in the supply of foreclosure filings must seem like welcome news to the local housing market. Still, the greater Ventura area is highly appealing to house flippers because the heavily discounted properties are sold quickly for significant gross profits, according to RealtyTrac data. The housing market of Ventura’s metropolitan region, the Oxnard-Thousand Oaks-Ventura MSA, was one of the biggest decliners in the country, falling by 43.6% from its peak in the first quarter of 2006, the median home price in the area fell by 43.6%.
2. Lake Havasu City-Kingman, Ariz.
> Avg. gross profit: $87,513
> Homes flipped through mid-2012: 219
> Avg. home price: $114,578 (216th lowest)
> Avg. days to flip: 99
Lake Havasu may not be a nationally renowned house-flipping mecca, but gross profits reported this year may soon burnish its reputation. Yet the party will not last as long as its neighboring area of Phoenix, which has a substantially larger inventory of foreclosed properties. Foreclosure filing decreased by 37% in the first half of 2012, compared to the same period in 2011. Foreclosed property buyers in Lake Havasu paid an average price of $108,078 in the first six months of 2012 — when the average foreclosed property was flipped for a profit of $87,513.
1. New York-Northern New Jersey-Long Island, N.Y.-N.J.-Pa.
> Avg. gross profit: $118,376
> Homes flipped through mid-2012: 949
> Avg. home price: $441,910 (13th highest)
> Avg. days to flip: 118
The New York area is the largest housing market in the United States, with more than 7.5 million housing units and nearly 18.9 million residents. And true to its big league reputation, there is no more profitable place for house flippers to turn around distressed properties, according to RealtyTrac data. But the available supply of foreclosed homes is slowly waning, off 14% in the first half of 2012 compared to the prior year. This has limited foreclosure sales, which fell 23.7% year-over-year. In the first six months of this year, the average foreclosed home sold at a discount of 39.4% to the average nonforeclosed home, down from 45.1% the year before.