Flipping homes, the practice of buying residential properties, renovating, and then reselling within 12 months, is happening at rates we haven’t seen since 2007, according to Realty Trac. Flips accounted for 5.5 percent of all home sales nationwide in 2015.
There’s no doubt that the primary motivation for home flippers is profit, and the practice can generate some pretty attractive returns. Redfin puts the average return on flipped properties nationwide at $102,400.
Flippers also lose money on these deals, of course, but in some markets the gains are significant. Three of the top house-flipping neighborhoods last year were in L.A. There, average profits on flips were as high as $312,000.
So clearly flipping homes can benefit the investor. But what is their effect on neighboring homeowners, and the local real estate picture?
For starters, many flippers invest in distressed and bank-owned properties that are often vacant and neglected, having languished on the market for one reason or another.
According to HUD, vacant homes are linked to increased crime (including arson), and have a negative effect on the value of surrounding properties. Getting those houses back on the tax rolls helps the community, moving in new owners or tenants improves safety, and renovations help eliminate neighborhood eyesores.
Another contribution that home flippers make to the community is injecting dollars into the local economy. Flip projects pump billions into local businesses each year, and provide work for local contractors. Renovations employ flooring companies install the carpet, painters, carpenters, and appliance installation teams. Local plumbers, electricians, and roofers are all likely to be involved in a flipping project.
This money flows into the local economy to strengthen local businesses and craftsmen.
Once the project is complete, the neighborhood has one more beautiful home. The greatly improved property sells for a good price, helping to maintain the neighborhood’s value, which in turn can help to reduce crime and improve the tax base, paving the way for better parks, schools, and other public amenities.
Flipping homes adds value to individual properties, but the effects are much more far-reaching than the seller’s bottom line. A property in good condition is always better for the neighboring homeowners than one that is not.
Home flippers are given a bad rap by some, and those people are looking at investors who buy the property and then wait 30 days and put it up for sale again without making any improvements. This behavior is not a true flip, and does nothing to benefit the surrounding neighborhood. In fact, in some cases, it is considered fraud.
There’s no guarantee of success for these projects. Honest home flippers earn every penny by taking the risk to purchase less desirable properties and then putting in the cash and work necessary to make them attractive and livable.
The continued popularity of this investment tactic is dependent on the housing market. Areas where low-priced properties are available, but demand is high enough to drive overall prices upward are ideal. According to Realty Trac, homes flipped in 2015 were on average purchased at a 26 percent discount below estimated market value and re-sold by the flipper at a 5 percent premium above estimated market value.