Home flippers made more money in 2015 than any year before, averaging just over $100,000 in profit upon the resale. In California, the average profit was even higher, according to a recent report by online brokerage, Redfin.
Redfin defines flippers as those who buy homes at a “discount,” often due to the home’s poor condition, make improvements then re-sell the home within the year for a profit. In some parts of California, these profits amount to hundreds of thousands of dollars.
Four of the top ten neighborhoods for flipper profits in the nation were in California in 2015. Here, homes sold for an average of:
- $312,000 more after flipping in the Mount Washington neighborhood of Los Angeles;
- $307,000 more after flipping in the Silverlake neighborhood of Los Angeles;
- $268,000 more after flipping in the North Sunnyvale neighborhood of San Jose; and
- $241,000 more after flipping in the Los Feliz neighborhood of Los Angeles.
Investors who get the highest gains upon re-listing their recent purchase first make renovations to the home. The successful flipper’s modus operandi is to purchase an outdated home in a high-tier neighborhood. Then, after revitalizing the home with paint, updated appliances and some extra curb appeal, they are able to sell the home at the price fetched by other homes in the neighborhood.
Market momentum also helps. California continues to see home price gains across the state. However, price increases have slowed in the past couple of years, with low-tier homes currently 7% higher than this time last year, down substantially from the 20%+ annual change seen in 2013. The price rise continues to slow in 2016.
The good, the bad and the flipper
Flippers are a conundrum for the housing market.
The kind of flipper who renovates homes for a profit can be good for the neighborhood since they boost neighboring property values by rehabilitating eyesores.
But the kind of flipper who holds onto the property as it is, planning to sell on market momentum alone — we call this breed of investor speculators — are downright harmful to local housing markets.
Speculators don’t add any real value to the home, but they do remove it from the inventory for a time, which, when done on a large scale, causes home prices to increase rapidly (as occurred in California during 2012-2014). Buyer-occupants find it hard to compete in this environment, and soon speculators are left competing only with other speculators, which slows sales volume considerably. Speculators eventually realized this in California, and in 2016 they are less common.
Further, despite record profits, even flippers who make property renovations continue to make up less and less of the national market. In 2015, 3.1% of homes sold were flips nationally, down from 4.2% in 2012.
However, while flippers decrease nationally, they are becoming more common in high-profit markets like California. In fact, while homebuyer-occupants are concentrated in the low-tier, flippers are relegated to high-tier homes in need of repair. In recent months, this trend has extended to commercial and multi-family properties.
With the recovery of the economy, more traditional sellers and buyer-occupants are returning to the market. This will be good for stability, a quality we haven’t associated with the housing market since before the Millennium Boom. Demand will continue to grow in step with the economic expansion expected to continue over the next few years. Flippers continue to play an important role in this recovery, but watch out for speculators, sure to return once the market heats up.