2014 Started Off Great for House Flippers, but It Won't End Well

×
real estate lawn sign sold...
Olivier Le Queinec/Shutterstock
It's starting to happen again. A buoyant real estate market is starting to birth many of the sights that we saw before the last bubble popped. Late night-infomercials pitching real estate as an investment -- "with little or no money down" -- are hitting the air. Flipping properties is hot again -- and some budding opportunists could get badly burned.

What Goes Around ...

More and more people are buying houses with the intention of sprucing them up and reselling them at sizable markups a few months later. Why not? Residential real estate prices have been consistently moving higher, especially in the markets that tumbled the most during the financial collapse. Mortgage rates remain reasonable. The economy's improving. What could go wrong?

Housing data analytics specialist RealtyTrac reported on Thursday that home flippers made a 30 percent gross return on their short-term purchases through the first three months of this year. That's impressive, and it's going to tempt more casual market observers into the fold.

However, the easy money has already been made, and it's going to be a lot more difficult to turn a quick profit on properties in the future. Let's go over five things to watch out for in this now-flawed pursuit for easy cash.

5 Reasons You Might Want to Skip the Flip

1. A 30 percent gross return is not a net return. RealtyTrac's data shows that flippers paid an average of $183,276 on a property investment, selling the house for an average of $238,850 a few months later. That sounds neat, but keep in mind that this doesn't mean pocketing a profit of $55,574. Flippers spend an average of nearly $5,000 to improve the properties they buy to make them more marketable -- about 3.34 percent of the purchase. But the bigger bargains are usually in sorry shape, making them more costly to spruce up. And in depending on where you live, the average price tag gets much higher: As RealtyTrac reports, in Atlanta the median amount spent on improving a flip was $18,250; in San Francisco, it was $13,900. Let's also not forget real estate brokerage commissions that can eat as much as 6 percent of a sale.

2. Carrying costs can be a killer. Anyone who has owned a home can tell you that it's not always a bargain. Utilities may not be as expensive for a vacant home, but taxes and insurance costs accrue between the purchase and the eventual sale.

3. Homebuilders are developing again. One factor helping the housing market's recovery is that real estate developers were forced to the sidelines during the early stages. Folks weren't buying houses, so they had no reason to build more. That has changed lately. Higher prices and rising demand have breathed new life into the construction business. That spike in new supply means flippers aren't just competing against existing properties. Deals may still be there for buyers of distressed properties, but the increased supply will make it harder to sell later.

4. Mortgage rates won't stay low forever. The Federal Reserve kept interest rates low during the long recessionary stretch and its aftermath, but now that the economy's showing genuine signs of life, we're seeing rates inch higher. Mortgage rates have actually been sliding a bit in recent weeks, but they're still almost a full percentage point above where they were during last year's record lows. Higher mortgage rates means fewer people who qualify to borrow the money to buy the homes that flippers are selling. As for investors, higher interest rates give more of an advantage to folks paying all cash for properties to flip. It's not easy to have all that money tied up in a property that may or may not sell a couple of months later.

5. Prices won't keep rising. The combination of the last two points -- more new homes going up and higher mortgage rates -- make it highly unlikely that prices will continue to increase at a rate that makes flipping as profitable as it has been recently.

It was fun while it lasted, but it's time for home flippers to find a new way to get rich.

Rick Munarriz is a Motley Fool contributing writer.

Increase your money and finance knowledge from home

Small Cap Investing

Learn now to invest in small companies the right way.

View Course »

What Is Your Risk Tolerance?

Answer the question "What type of investor am I?".

View Course »

Add a Comment

*0 / 3000 Character Maximum

21 Comments

Filter by:
Eric Chavarria

I flip houses for a living.... if you know what you are doing there will always be a market fro flipping houses. I spend on average $30,000 remodeling the houses and I make an average of $30,000 profit per home. I don about 5-8 per year. Rates are not going up any time soon and even when they do people will still buy houses. People bought houses in the 80's with interest rates around 18%. Builders are not your competition as Flipped homes are cheaper and look just as good and sometimes even better depending on the builder and upgrades. Don't let this guy scare you....Unless you want to flip houses in the Tampa Bay area....in that case the market is terrible and you should listen to this guy. LOL.

August 11 2014 at 4:27 PM Report abuse rate up rate down Reply
thefacts22

How are we going to believe in those that yesterday said the Detroit,,was a "good" place to flip houses,the only thing flipping is poverty

May 07 2014 at 5:07 PM Report abuse +1 rate up rate down Reply
Iselin007

The Public sector piled on years of high pay and benefits while the Private sector's manufacturing jobs and other good jobs went away or became displaced by visa workers.

The unsustainable burden on the residents forces them out and to sell which the flippers find attractive. Once the people on visas are satisfied the demand for housing will drop and the prices will level lower because no body with a crap job will be able to live here unless Social Services picks up the tab! The real middle class is shrinking the flippers need to find a new career America has had enough.

May 07 2014 at 3:05 PM Report abuse -2 rate up rate down Reply
1 reply to Iselin007's comment
thefacts22

Many refuse to see the collapse we will face in the near future,we are in the hands of incompetents and crooks

May 07 2014 at 5:10 PM Report abuse +1 rate up rate down Reply
Iselin007

Things here are already over priced and over taxed. A house and property in Florida bought 4 years ago at under $100 k by my sister and her husband would of sold here in NJ for for over 4 times as much. Here you being paying over 4 times the property taxes ect! The scammers here arent planning on staying because they are here for the quick roller bonus then move on before the bubble pops.

May 07 2014 at 2:33 PM Report abuse +1 rate up rate down Reply
sam54ct

Flipping has taken place throughout History. After every downturn in the economy, those affected the most, often lose their homes. The wealthy, step up and buy everything at rock botttom prices, turn them into rentals, at inflated prices, given the extra renters now in the market, and sell once prices recover, back to the same people who lost homes, now at inflated high prices. Thankfully we own our homes, never played the flipping game, though my Sister bought a few lake homes this downturn, to use aas rental income in retirement.

May 07 2014 at 2:22 PM Report abuse rate up rate down Reply
Iselin007

At least Robin Hood would rob the rich to give to the poor these flippers are worst than the monster tying poor Nellie to the railroad tracks or cheating the old woman in the shoe.

May 07 2014 at 2:19 PM Report abuse -4 rate up rate down Reply
1 reply to Iselin007's comment
thefacts22

Flipping and building houses is an honest business,all is needed are customers.....

May 07 2014 at 5:12 PM Report abuse +2 rate up rate down Reply
Iselin007

Yellen hinted in her comments how the housing was tied to the incomes and job market.
The sudden surge in not in the labor force, the refusal to peg a point in numbers of workers employed, (or unemployed but in the labor force) before the economy was normal to begin raising interest rates.

Yellen is not going to come out with a certain trigger for rates because she hints how the unemployment rate is being manipulated and knows that longterm unemployment and not in the labor would shrink if people had a good economy, and hiring for suitable jobs.

Housing purchases requires stabile sufficient income to pay a mortage. The flippers are helping to create another crash. The real economy can't handle more greedy flippers they ought to find a job outside the United States!

May 07 2014 at 1:43 PM Report abuse -2 rate up rate down Reply
1 reply to Iselin007's comment
thefacts22

Will you blame for a change Democrats for the housing crisis,they were "selling" housse to people that would never pay

May 07 2014 at 5:15 PM Report abuse +1 rate up rate down Reply
1 reply to thefacts22's comment
Curt's Stuff

I believe George Bush coined "the ownership society."

May 07 2014 at 8:41 PM Report abuse rate up rate down
Silent Hill

Realestate prices have risen disproportionetly to peoples income. This is the primary reason to avoid flipping.

Sure interest rates are low now, but the economy is in horrendous shape. We are one financial disaster away from there being a flood of forclosures. If you are holding property when that happens = game over.

May 07 2014 at 12:58 PM Report abuse +5 rate up rate down Reply
1 reply to Silent Hill's comment
Iselin007

They should just hang the house flippers they are the trash destroying the American Dream.

May 07 2014 at 1:46 PM Report abuse -3 rate up rate down Reply
Valerie

There is no question that the housing market is bubbling up, again. And this is like a re-run of a bad dream.

Realtors have a heavy responsibility for this developing mess. Telling people that buying a house, at hugely inflated prices, is a great "investment in their future that will be their biggest financial asset". A house isn't an asset. It's a huge liability that continually costs you money in terms of mortgage interest, annual property taxes, ongoing maintenance and repairs, the costs of heating and cooling, etc.

Bernie Madoff looks like an amateur next to the snake oil salespeople in the real estate field.

Banks are also complicit in this nightmare. They are all sitting on a huge pile of home foreclosures. It they dump those into the housing market, it will crash sooner. So, they continue to hold those on their books.

Only six years since the 2008 crash, and house buyers are falling all over themselves lining up to get fleeced, again. They are all convinced that "this time it will be different". WHAT does it take for people to learn what a scam this is?????

May 07 2014 at 12:47 PM Report abuse +3 rate up rate down Reply
1 reply to Valerie's comment
Iselin007

People come to this country because they know they can get rich turning family homes in to a big investment using laundered cash from false Insurance claims, untaxed cash register profits, and other scams to buy low and flip high. Some smuggle aliens to get the money to raise investment cash or other major frauds.

May 07 2014 at 2:15 PM Report abuse -1 rate up rate down Reply
krazeturbo100

Here in LA houses prices are on a much larger scale than this article ...most have gone up even higher than before the crash which is insane....really hoping all the investors finally get burned after they bought out over half the inventory in LA after the crash....already see for sale signs popping up everywhere now ....

May 07 2014 at 11:12 AM Report abuse +2 rate up rate down Reply