For the past several years single-family housing investors have been playing the buy and hold game. Strong rental demand and soft home prices made that the best bet. Now, with home prices up more than 12 percent from a year ago, the strategy is suddenly changing.
“It’s a perfect storm for flipping right now in many parts of the country because home prices are bouncing off the bottom,” said Daren Blomquist, vice president at RealtyTrac. “That is something that flippers can catch on the coattails of and ride that wave as long as it lasts.”
Home flipping, defined as buying and selling the same home within six months, came roaring back in the first half of this year. There were 136,184 homes flipped, an increase of 19 percent from a year ago and 74 percent from the first half of 2011, according to a new report to be released Friday by RealtyTrac.
Those increases, however, are nothing compared with the jump in profit. Investors made an average gross profit of $18,391 per home, or a 9 percent gross return. That is up 246 percent from a year ago.
“Home-flipping business has keyed up quite a bit in the last 6 months,” said Steve Jones, founder of Los Angeles-based Better Shelter. Jones has been flipping homes for five years, but the competition now, he said, is really heating up.
“There’s not a lot of inventory, and every time a listing comes up it’s like piranha in the water.”
Jones bought and flipped eight houses in the first half of this year, going in with all-cash and looking for hidden value, like unique architecture or renovation potential. He does quite a bit of work on the homes, always looking at the bottom line, but also imagining who the end buyer is going to be.
“Some homes you do really great, and some homes you kind of do OK. I have to keep my crews busy, so it averages out,” said Jones.
The math is looking better and better to investors as prices rise, with one possible hitch: Rising mortgage rates. Investors largely use cash on the front end, but their buyers don’t.
“On the flip side, when they are actually flipping the properties to the end-users, interest rates matter because those end-users will not be able to afford as much as interest rates go up.” added Blomquist.
Large-scale institutional investors have been swarming the distressed housing market since the height of the housing crash, buying homes in bulk, rehabilitating them and putting them up for rent. Companies like Blackstone (BX), Colony Capital, Waypoint and hedge fund titan John Paulson have been reaping solid rewards on the trade.
Paulson, speaking at CNBC’s Delivering Alpha conference, said he is still high on housing.
“It’s not too late to get involved. I still think buying a home is the best investment any individual can make. Affordability is still at an all-time high,” said Paulson.
Large-scale investors, however, may not be behind the surge in home flipping. They may, in fact, be the cause of it.
“Now that the institutional investors are doing buy and hold, a lot of these guys [individual investors] can’t compete with their checkbooks,” said Rick Sharga, formerly an executive at Carrington who now works for Auction.com. “In some cases the individual investors are flipping them to the institutional investors.”
While many of the large funds have teams that renovate homes, in some cases they would rather pay a premium for a move-in-ready property, rather than waste time and money remodeling.
“So the flippers are kind of the in-between middleman who is getting the property into good rentable condition and then selling to the institutional investors,” explained Blomquist.
The renovation of course takes away from the flipper’s profit, begging the question, if a flipper is getting perhaps a 5 percent return on the investment after costs, why not play the stock market instead? Surely they will see a bigger profit faster, but there is larger downside risk.
“You can’t control the stock market,” remarked Sharga. “You have a little bit more ability to control your success in housing if you know what you’re doing and you know your market well.”
The potential profit from house flipping varies dramatically market to market.
Formerly hot investor markets like Phoenix, Las Vegas and much of Southern California are seeing big drops in flipping, as there is very little to buy and what is available is selling at a premium.
–By CNBC’s Diana Olick. Follow her on Twitter @Diana_Olick .real estate