When U.S. home prices rose quickly in recent years, the market was ideal for flippers, investors who buy, renovate, and quickly resell properties. Profits were lucrative, and competition for houses was fierce.
But with home values leveling off, returns on flippers' investments have been more modest even as deals are easier to find, industry observers say. It also has meant flippers can't count on fast-price appreciation to cover up for mistakes they might have made along the way.
Prices for existing single-family houses across the United States hit their 15th-consecutive record high, according to the latest S&P CoreLogic Case-Shiller U.S. National Home Price Index. However, while the cost of houses increased 4.2% from a year earlier in August, the data marked the fifth consecutive month the growth in prices has slowed to the smallest rate of annual growth since 2023.
More than a decade ago, home flipping helped the U.S. housing market recover from the worst downturn since the Great Depression. Investors bought properties on the cheap and renovated them, helping buoy prices and neighborhoods rocked by foreclosures recover. In recent years, flipping also has helped reinvigorate a depleted housing stock.
In some areas, "if you're a buyer and you want a new home close in, you have to turn to a custom homebuilder or you turn to flippers," said Alex Thomas, a senior research analyst with the Irvine, California-based John Burns Research & Consulting, in an interview.
Rising levels of homes for sale and still-elevated mortgage rates weighed on house flipping in the second quarter, according to the Burns + Sundae + Kiavi Fix and Flip Market Index. The index is based on a survey of more than 500 flippers nationwide.
The latest index shows the fix-and-flip market remains vibrant, but less so than it was previously. The latest reading of 63 for the period from April to June is down from 66 in both the first quarter and second quarters of 2023. Readings above 50 show an expanding market.
Longer selling times
In Texas and Florida, where the supply of homes has risen faster than other regions, partly due to new homes under construction, renovated homes are staying on the market longer. As a result, flippers aren't getting the prices they expected, according to the survey.
In a softening market, it's critical that flippers buy modest homes at the right price, according to Lex Levinrad, an investor in Boca Raton, Florida, who runs weekend seminars for fellow flippers.
He recalls one investor who bought a five-bedroom house with a swimming pool to fix and flip in Brevard County on Florida's Space Coast. She paid too much, and the price point was too high for a beginner, Levinrad said.
What's more is that she severely underestimated the cost of repairs and the time it would take to complete them. She skipped two interest payments to the lender and was trying to sell the home for the loan balance, but the deal didn't make sense for an investor, Levinrad said in an interview.
"She almost started crying when I told her that I could not pay anywhere near her loan balance," he said. "A lot of that is happening now. People are realizing that they overpaid since it is no longer a hot market."
Levinrad's training courses counsel prospective investors on how to structure deals so they don't lose money. The practice requires a formula, he said.
From the Homes.com blog: The Economics of Real Estate: 13 Factors that Affect Home Values
Hidden fees
He tells students they shouldn't buy a home for any more than 65% of the market value after repairs. So if a house is worth $350,000 after it's renovated, and it requires $20,000 in work, the maximum price an investor should pay is about $227,500.
Flippers have to account for hidden fees, such as up-front insurance payments, commissions and closing costs. Also, repairs can quickly exceed even the most meticulous budgets.
To flip a small starter home, Levinrad said, an investor needs to have access to about $50,000 to cover a 10% down payment in closing costs and other fees, as well as repairs that include at a minimum flooring, a new kitchen and appliance and bathrooms. Buying a home that needs more extensive repairs is a risk, he said.
Kam Javidzad used the formula to buy a three-bedroom home in suburban Miami this year. He paid $367,000 for the house before putting in $55,000 worth of upgrades, including a new kitchen, bathrooms and flooring. He sold the house a few months later for $525,000.
But there was plenty of trial and error just to find the right property.
"I'd see houses I'd like, but Lex [Levinrad] would say, 'Kam, this is not it,' and he'd explain the reasons why," Javidzad said in an interview.
Reaching a successful conclusion on a flip takes time and attention to detail, he said. For example, Javidzad said it's imperative to supervise the contractors performing the work and to buy the supplies for them to contain costs. It's also not a bad idea to offer crews incentives such as offering to throw a party if the work is completed on time, he said.
"You have to run your numbers very conservatively," Javidzad said. "If you think the rehab and closing costs are going to cost X, estimate even more. You have to have enough of a cushion for air."