Is Flipping Dead?

By
Real Estate Sales Representative with Remax Results

The Great Recession was a candy store for investors. Flipping gurus packed convention halls with people convinced that they can make a fortune using their system that cost upwards of $10,000. There were tremendous opportunities for those who had faith that the market would rebound. Fast forward from 2008 to 2018, the market did come back.

As a real estate coach once told me, “Stocks and bonds can spike or disappear. Real estate can go up and down, but it’s always there. That’s why they call it real.”

Housing inventory right now is very tight, there is a shortage of traditional sales, even less of distressed homes. Total distressed homes sold in Hennepin County in 2017 was 663, compared to over 5000 traditional sales. RealtyTrac shows that only 1 in 3411 homes is distressed in Minnesota. Across the country some areas are still having trouble, like New Jersey where 1 in 740 are in foreclosure. But, for most of Minnesota foreclosures are back to pre-recession levels. Problem #1 for flippers is lack of inventory.

Last week I showed a foreclosed property that was on the market for 1 day. As we went into in the basement I noticed ice on the floor, and heard water dripping. A pipe burst and water was splattering all over the floor. At below freezing weather that’s an emergency. I left an SOS message for the agent. The house was in rough condition before the water problem, but my client wanted to make an offer. He was excited, I wasn’t. It needs windows, roof, new boiler, kitchen, flooring, bathroom rehab, the dollar signs were swirling in my head. It was in multiple offers, my client offered well over asking, but didn’t win. Sellers want cash for a property that isn’t habitable; functioning heat and hot water. It had neither. During the recession we would have negotiated the price down, not now. Multiple offers are the norm. We’re all surprised if a home lingers on the market.

The #2 problem is rising costs. Lumber just jumped 30% in price, and tradespeople are in short supply. If your carpenter is in the middle of job and gets a better offer, he can walk. Lack of a skilled labor force is holding down new construction, and rehabbing.

The disaster areas around the country are affecting normal supply and demand. Statistics show that 6 months - 1 year after a disaster that home sales spike by 11%. Many damaged homes aren’t salvageable, and people need a new place to live. Materials and labor are funneled to areas in need, and prices go up.

The 3rd challenge is that buyers with FHA loans expect that a seller is obligated to pay their 3% in closing costs. Lenders let them believe that they can get up to 6% back from the seller. That’s not the case. Seller contribution is always negotiable, no one is obligated to pay a buyer’s costs. More than a 3% contribution from the seller skews appraisal values. In 2017, 25% of transactions had appraisal issues. Calculating the cost of acquisition, holding, and sales of a home is almost always underestimated. Seasoned flippers have learned only by going through the fire what it is really going to cost. There is an ongoing learning curve, and changing markets. The best time to flip homes is when there is a supply of cheap homes in need of upgrading. Is Flipping completely dead? No, but it’s on a respirator. Home prices continue to climb, inventory is low, and profit margins have shrunk. Real estate is always expensive short term. FLIPPER’S brother REHABBER is doing better buying and holding. That time gives an investor time to recover costs and see enough increase in price to see a real profit.

 

Posted by

Mary Jo Quay

“That’s what I do: I move people—H O M E.”

 Phone: (612) 384-1360

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Rainmaker
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Roy Kelley
Realty Group Referrals - Gaithersburg, MD
Roy and Dolores Kelley Photographs

Flipping is certainly not dead in our market. 

Thanks for sharing your experience.

Feb 06, 2018 08:03 AM #1
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Debe Maxwell, CRS
www.AtHomesCharlotte.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
Charlotte Homes for Sale - Charlotte Neighborhoods

Home prices have risen so quickly that the "low hanging fruit" that was available just a little while ago is tough to find. We've still got flipping in our area but it has slowed considerably the past two years.

Feb 06, 2018 12:15 PM #2
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Mike Frazier
Carousel Realty of Dyer County - Dyersburg, TN
Northwest Tennessee Realtor

The market has really turned. I bet you were glad your offer did not win on that dog of a house?

Feb 06, 2018 03:02 PM #3
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

We are seeing investors pay well above list and not making smart decisions. Flipping has changed and these investors are going to get burned.

Feb 07, 2018 09:16 PM #4
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85,270
Mike Crosby
Mike Crosby Realty - Placentia, CA
Placentia- Yorba Linda Real Estate - 714-742-2897

 About a year ago,  in Orange County,  California, I had a listing in the Description I said:

"Is this the perfect flipper?"

The property was appraised for $465,000.  We had 25 all cash offers and sold it for $500,000 closed escrow in 7 days.   

Mar 08, 2018 10:11 AM #5
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