House flip profits down, sales still account for about 10% of local home sales

Despite what you may have read elsewhere, home-flipping has not gone off the tracks in the Tri-Cities region. In fact, it has increased in two of the local counties in Attom Data Solutions’ third-quarter U.S. Home Flipping Report. One reason for the local contradiction is a very tight resale inventory in a market where too few new homes have been built in the past decade.

According to the report, 56,566 U.S. single-family homes and condos were flipped in the third quarter of 2019, down 12.9% from the previous quarter and down 6.8% from a year ago. These drops marked the largest quarterly and annual drops since the third quarter of 2014.

In the five local counties including in the analysis, there were 176 flips. That’s two fewer than the Q2 total and 61 more than Q1. So far this year, there have been 469 flips in Carter, Greene, Hawkins, Sullivan, and Washington counties. Here’s a reference point. During 2018 thee were 396 new home sales in the region. So far this year, local flip sales accounted for about one out of every 10 single-family resales during the first nine months of 2019. That means flipping and the people who engage in it are a bigger story than you might think.

Flipping is a full-time business for firms like New Again Houses in Bristol. At the same time, it’s an investment vehicle for other entrepreneurs. Some flip and sell homes; others add them to the rental inventory.

Attom’s analysis shows that the U.S. average gross profit “translated into a 40.6% return on investment compared to the original purchase price.” All local counties included in the report had a higher gross return on investment than what was reported for the national norm. Here’s what the Q3 median flipped price and gross ROI looked like for local counties.

Carter – $124,950, 98%.
Greene – $122,750, 50.4%.
Hawkins – $125,000, 52.4%.
Sullivan – $112,500, 73.1%.
Washington, $130,000, 85.7%.

That’s an average, and there are examples of flippers who didn’t achieve the average. At the same time, better-than-the-national-norm is the constant for the local market.

Market forces are making it harder and harder for investors to complete the kinds of deal they were getting as recently as last year. These forces are keeping profits way down from post-recession high and show no signs of easing, according to Todd Teta, chief product officer at Attom. The report also quotes sources saying declining profits on flips are leading to much greater interest in renting out renovated properties instead of selling them.

Those conditions – especially lower profits when compared to previous years – are also prevalent in the local market. For instance, during Q3 2015 the average between purchase and sales price for Sullivan county flips was down $55,432 and down $46,319 in Washington county. The primary reason was the purchase price for Sullivan Co. flips were 22% higher this year than they were during Q3 2017 while the average sales price was 7% higher. During the same time frame the average purchase price in Washington Co. increased by 44% while the averages sales price increased 20%.

Matt Lavinder

Matt Lavinder, New House Again, said 2019 has been a great year. But it hasn’t been a year without challenges. New House Again was launched in 2008. The firm buys, remodel then sells those homes. It has expanded and has now has several franchises. Lavinder said he and his staff are really focused and trying to deliver quality affordable housing. The attention to focus is the reality that margins are very thin in the flipping market. Besides tight margins and there are other headwinds. One that flippers and builders often cite is despite calls from civic organizations and governments for more workforce flippers, remodelers and builders face what they call very high code constraints. Lavinder said, “local codes are more rigorous in the Tri-Cities than they are in Nashville, Atlanta or Knoxville. There has to be a solution. Governments have to take it seriously” if the goal is to aggressively move toward more workforce housings.

Workforce housing is generally understood to mean affordable housing for households with earned income that is insufficient to secure quality housing in reasonable proximity to the workplace.
Demand for housing that hits the market with a price-point of $200,000 or below is high. Sales at that price used to account for a little more than 76% of all local resales. Currently, the market share has declined by a little more than 3% while sales in the next higher price point – $200,000 to $399,9990, has increased by 3%. That is taxing the region’s affordability status as measured by the ability of the average wage earner having enough buying power to purchase a median-priced home.

Using the typical statistical model to measure affordability, the region meets affordability standards, but only if buyers can find a home in the affordable price range.

Report methodology. Attom defines a single-family or condo flip as any arms-length transaction that occurred in the quarter where a previously arms-length transaction on the same property had occurred within the last 12 months. The average gross flipping profit is the difference between the purchase price and the flipped price – not including rehab cost and other expenses incurred in the project. Flipping veterans estimate typical expenses fun anywhere between 20% and 33% of the property’s after repair value. Gross flipping return on investment was calculated by dividing the gross flipping profit by the first sales (purchase price.)

Categories: REAL ESTATE

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