Flipping is Becoming a Trend in 2022
When I first stared working as a realtor in 2004, a majority of the transactions that I did on any given year were usually residential first time home sales. I would work with clients from all different socioeconomic backgrounds and help them find the ideal neighborhood and home for their budget. When the housing and financial crisis happened in 2008 and interest rates went down to near zero for an extended period of time, I became acquainted with the art of flipping homes.
For those who are not in the know, house flipping is a type of real estate investment strategy where an investor purchases a property with the intention of renovating and reselling it for a profit. The goal is to buy a property that is undervalued or in need of repairs, make the necessary improvements, and then sell it for more than the purchase price and renovation costs. As I started building my network of professionals back in those days, most transactions remained residentially focused, with only 1 in 10 transactions belonging to a short term investor. While the recovery after the Great Recession maintained interest rates artificially low, the art of house flipping became more and more popular. However, the pandemic has really brought this type of short term investment to the forefront of real estate transactions. Just 5 years ago in 2017-2018, about 6% of the transactions nationwide were for short term investors to flip. If we take a look at that now in 2022, the number has almost doubled to 10%, that is a staggering trend!
While that’s not surprising nationwide, what is surprising is that there are people successfully doing it here in the Bay Area. A "fixer-upper" typically refers to a property that is in need of significant repairs or renovations in order to be habitable and is generally sold at a steep discount in comparison to similar homes in the neighborhood. In most regions of the United States, this provides buying opportunities to those who typically do not have so much access to capital to purchase a home. These kinds of properties also present an opportunity to buyers who are willing to invest time and money into fixing them up. But what stuck out to me is that fixer upper properties in the Bay are not as affordable as people believe that they are.
Before and after of a home renovation one of my clients completed in North Berkeley, California
The home features ceramic floor tiles, recessed lighting, and better access into a washroom/mud room.
In 2022, the median home price in the Bay was approximately $900,000, including fixer uppers and renovation investment properties. At such a high price, are these homes worthy investments? It depends… In addition to the high acquisition costs in the Bay, fixer-uppers often come with hidden costs that may not be apparent during the initial inspection. As you begin to peel back layers, you may uncover additional repairs or issues that need to be addressed, which can quickly add up and exceed your budget. Additionally, depending on the extent of the renovations needed, a fixer-upper can take a lot of time to complete. Those buyers who plan to do the renovations themselves also face additional pitfalls, as DIY projects can often take longer and be more difficult than anticipated. However, the most challenging part of a fixer upper is getting a mortgage for the property. Some lenders will require a higher down payment, and the property may need to meet certain requirements to qualify for a mortgage.
After seeing these trends and thinking through the potential pitfalls and difficulties in doing home flipping, I started to ask myself how I would set up a strategy for success in short term home investments given the current market macro and micro economic trends.
I’m happy to present those who are interested in pursuing short term real estate investment with the following key points to consider as they enter this popular business strategy.
Investing in a home, even in the tail end of the COVID-19 pandemic can be a bit more challenging than during normal times, but there are still opportunities to make a wise investment. The reason behind this is that the pandemic has caused economic uncertainty and some homeowners may be looking to sell their homes quickly. This can result in better deals and bargaining power for buyers, but also means that transaction times are not always as fast as they used to be. Be prepared for delays in the home buying process, such as longer closing times or delays in inspections.Overall, investing in a home during COVID-19 requires careful consideration and research, but with the right approach, it can still be a smart investment.
House flipping can be a potentially profitable investment strategy, but it also comes with risks. Aside from the common sense advice that I give to first time homebuyers (see the article here), investors need to think about some additional risks of short term investment including:
Unexpected renovation costs: Renovations can often be more expensive and time-consuming than anticipated, which can eat into potential profits.
Market fluctuations: Housing markets can be unpredictable, and if the market turns downward, it can be difficult to sell the property for a profit.
Competition: Flipping properties has become a popular investment strategy, and competition for undervalued properties can be intense.
Financing issues: Flipping properties often requires financing, and if the investor is unable to secure financing or has difficulty making payments, it can result in the loss of the property and potential profits.
Legal issues: Flipping properties requires knowledge of local regulations, permits, and zoning laws. Violating any of these laws can result in fines or legal action.
A couple of things to keep in mind on top of doing your homework is that the profitability of house flipping been contracting since 2017. According to the Motley Fool “On average nationwide, house flipping generated a gross profit of $65,000 in 2021, on par with gross profit in 2017. But return on investment has shrunk to 31% from 51% over the same period. Gross flipping profit rose to $67,000 in the first quarter of 2022 but return on investment continued to decline to just 26%.”
Overall, house flipping can be a potentially profitable investment strategy, but it requires careful research, planning, and execution to be successful. Investors should thoroughly evaluate the property, renovation costs, and potential profits before making a purchase decision. They should also be prepared to handle unexpected issues that may arise during the renovation process.
As always, I’m more than happy to answer questions and to serve as a guide for those investors who are looking for short term or long term real estate investment projects. You can reach me at ernestina@vadillorealty.com.
