Home Flipping Is on the Rise
May 18, 2016
Home flipping sometimes means a good profit for home sellers, but it could also spell trouble for the housing market by increasing home prices and making homes less affordable for potential buyers, experts warn.
The number of active home flippers in 2015 was at the highest level in the past eight years, according to RealtyTrac. The average gross profit—the difference between the purchase price and the sales price of the flip—from home flipping also hit a 10-year high at $55,000. Flips made up 5.5 percent of all home sales in 2015.
Home flipping is any transaction that occurs on the same property twice within 12 months.
“Flipping tends to be done by investors, usually smaller investors, who think a market is undervalued and will typically invest in anywhere from one to three properties at a time,” says Julia Dugger, director of marketing and vendor performance management for Fannie Mae.
Flipping is a “normal” part of the real estate market and can add value to properties, says Amy Heinz, managing director of Fannie Mae’s Mortgage Fraud Program. “This activity can go a long way toward gentrifying neighborhoods,” she adds.
Homes flipped in 2015 were purchased at an average discount of 26 percent below estimated market value. Those homes were then resold by the “flipper” at a 5 percent premium above estimated market value, says Daren Blomquist, senior vice president at RealtyTrac, in a recent release.
“More inexperienced home flippers with a smaller financial cushion could be sign of an over-speculative market, but the data indicates that flippers in 2015 continued to operate within relatively conservative margins,” adds Blomquist.
Does Home Flipping Lead to a Flopping Market?
A rise in the home flipping numbers sometimes runs the risk of making housing “even less affordable for buyers and increasing the risk of a bubble,” says Matthew Gardner, chief economist at Windermere Real Estate in Seattle in a statement with RealtyTrac.
Of those metro markets that experienced the biggest year-over-year increase, two were based in Florida: Jacksonville (up 41 percent) and Homosassa Springs (up 40 percent).
Miami had the most homes flipped of any market throughout the country in 2015, with 10,658 total homes flipped that year.
“We continue to see distressed properties funnel through the pipeline in South Florida, which makes it ripe for investors to profit in a strong selling market,” says Mike Pappas, CEO and president at the Keyes Company, in a statement with RealtyTrac.
Metro markets that registered the highest average gross return on investment (ROI) include Pittsburgh (129.5 percent), New Orleans (99.2 percent), and Philadelphia (98.4 percent), according to RealtyTrac.
Nevada, Alabama, Arizona, and Tennessee were the states that had the highest share of home flips in 2015.
To help encourage productive real estate activity and discourage fraudulent flips of its REO properties, Fannie Mae, the publisher of The Home Story, places deed restrictions — no resale for greater than 120 percent of the short sale price within 90 days — on its HomePath®.com properties. The timing is meant to encourage new owners to make improvements like renovating a kitchen or repairing a foundation issue and add real value to these properties before selling them.
“The deed restrictions provide a reasonable amount of time that we think would be required for someone to make repairs to a property,” says Chris Kocks, director of the Single Family Program Office for Fannie Mae.
The deed restrictions also work to prevent fraud and support the improvement of the available housing stock. But there is a “dark side” to flipping, says Heinz.
“Flipping has been Fannie Mae’s most prevalent fraud scheme in fraud investigations involving distressed and foreclosed real estate,” she adds.
The tactics that Heinz and her department frequently see are “flopping” (suppressing the purchase price in the original transaction) and using misleading or fraudulent approvals to inflate the purchase price in the flip transaction.
“Other strategies involve duping naïve buyers who can’t afford the property into purchasing the flip at an inflated price, or involve the use of a straw buyer (an accomplice who is used to cover up the identity of the true purchaser),” says Heinz.
The deed restrictions Fannie Mae has in place are meant to provide a cooling-off period for the buyer and encourage responsible ownership of the property, says Kocks. He adds: “At the end of the day we want an owner-occupant who has a place to call ‘home,’ and I hope that we are the principal facilitators of those transactions.”