Photo: Robert Clark
Home flipping in the US can sometimes lead to hefty profits, but would-be flippers are wise to heed the old adage about real estate being all about location, location, location.
But with a drop in homeownership, there may be fewer potential buyers regardless of your location, according to a new report by the personal finance site WalletHub.
In 2017, the average US home flipper made $68,143 in profit despite a national homeownership rate of 64.2 percent — down from a high of 69.2 percent in 2004. The drop in the homeownership rate “may translate to fewer potential buyers off the bat,” writes WalletHub.
Looking at data for 170 housing markets across the country, WalletHub determined which markets were most hospitable to home flipping based on its median home price, average renovation costs and overall quality of life.
Of the 170 markets studied for the report, WalletHub ranked Sioux Falls, SD as the nation’s top overall market for home flipping. Sioux Falls received an overall score of 73.18 points out of a possible 100, based on its overall market potential, renovation costs and quality of life.
While Sioux Falls scored in the middle of the road on market potential, it ranked quite high on quality of life.
Yonkers, NY, Newark, NJ and Bridgeport, CT were rated as the worst overall markets for home flipping. While the Newark housing market scored quite well, high renovation costs and a low quality of life score made it less than ideal for home flipping.
But in terms of pure profitability, the Pittsburgh, PA offered home flippers the highest return on their investment. (Pittsburgh was tied with Philadelphia, PA, Cleveland, OH, Baton Rouge, LA and Wilmington, DE.)
Conversely, the white-hot San Jose, CA was in the bottom five markets offering the lowest average gross return on investment.
High median home purchase prices in the California housing market shut the Golden State out of the top third of best home flipping markets, despite it being home to some of the country’s hottest markets, like Los Angeles and San Francisco — in addition to the aforementioned San Jose market.
Three Nevada cities — Las Vegas, Henderson and North Las Vegas — ranked among the top markets with the highest percentage of home flips. The Las Vegas market was hit hard by the housing crash and home values still have not returned to their pre-crisis levels.
While many would-be home flippers may be lured by potential profits, experts warn that home flipping comes with a steep learning curve.
“Most rookies fail to consider all of the costs involved in purchasing and reselling residential property, like permits and property taxes,” Pennsylvania Builders Association CEO Daniel E. Durden says in the digital release.
Similarly, experts find that many first-time flippers underestimate how much time, and money, renovations and repairs actually take.
But for those undeterred by the expert warnings and inherent risk of the deal, Professor Robert M. Silverman from the Department of Urban Planning at the School of Architecture and Planning at the University of Buffalo offers some parting advice.
“Properties selling for under-market value that are located in high demand housing markets are good candidates for a flip, especially if they are structurally sound and just in need of cosmetic updates,” Silverman advises in the report.
The allure of house flipping, popularized on HGTV, isn’t likely to dissipate anytime soon despite the many risks glossed over by “reality” television.
“Under the right market conditions, a flipper can create a profitable business where he or she buys, renovates, and resells property with decent profit margins,” Silverman tells Livabl.
But running out of money before completing the flip is a reality for many would-be flippers and one Silverman says is often not shown on television.
“There is also a segment of the flipping market where experienced flippers buy up properties that less experienced flippers have failed to renovate. In essence, the first flipper may run out of money and a more experienced one will come in and buy them out and complete the flip,” Silverman explains.
The three things needed to be successful at house flipping? Silverman says experience, real estate knowledge, and equity capital.
Click here to read the entire release.