Property flippers are savvier than the average seller, earning greater profits on their short-term investments compared to the overall market performance, according to a study of three booming real estate markets.
The First American Real Estate Solutions study, “Real Estate Flipping: Gold Mine, Mistake, or Fraud?” examines flipping activity from 1999 to June 2005 in three hot real estate markets – Orange County, Calif.; Clark County, Nev.; and Miami-Dade County, Fla.
The study found that flippers earned their highest rate of return for reselling properties within three to six months, and their profits typically exceeded overall market performance during the study period.
The report defines flipping as the “purchase of a home for quick resale, to make a substantial profit in a short time.”
Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, said that while flippers seemed to do quite well in these markets during the study period, the practice of purchasing properties for a quick resale can be risky, too, and there are no guarantees that the market will be so ripe for flipping in the coming months.
“I was surprised that they did so well,” Cagan said of the flippers in the study areas, adding, “I think many of them had professional savvy – more than the general public. I think some of them bought properties that might have been either undervalued or distressed, in need of repair, and got them cheaply.”
In one Las Vegas ZIP code, about 52.3 percent of all residential real estate sales from January 2005 to June 2005 were defined as flips, according to the report, and about one quarter of flipped properties in the area were bought and resold within six to 12 months. In another hot real estate area in Las Vegas, about 14.5 percent of all flipping activity this year was in properties that were bought and resold within three months.
Flippers did exceptionally well in the three counties in 2004, the study found, when they “almost always made 15 percent or more gross profit” – converted to an annualized basis the appreciation rates “often exceeded 50 percent and even 100 percent.” For flips of six to 12 months, the annualized profit rates in the three counties were often over 40 percent, the study also found.
The study considered a gross profit of 15 percent to be a break-even point for property flipping.
In one Miami ZIP code, flippers took in a median annualized appreciation rate of 185 percent in for flips of three to six months in 2004, and from January 2005 to June 2005 that rate was 117 percent. Another Miami ZIP code had a rate of 152 percent in 2004 and a rate of 150 percent from January 2005 to June 2005 for flips of three to six months. The study did not examine pre-construction flipping activity, in which property purchase rights are bought and resold before a unit is built.
Cagan said, “I knew that flippers were making money because I knew the general market was rising.” But he didn’t expect flipping to be such a profitable venture in the markets studied. Such profitability, though, is probably not sustainable in the long term, he said.
“Flipping is speculative. At some point if the market were to turn, flippers might not get their money. That’s what speculation is all about – you can make a lot of money real fast or you can lose it. You should not expect a guaranteed goldmine,” Cagan said.
While the study found that flipping sales did not dominate the overall real estate markets as a percentage of total sales, “in smaller local areas, flip sales can dominate the market.”
The National Association of Home Builders announced in June that builders are taking steps to curb speculative home buying in hot housing markets, such as requiring buyers to occupy new units for at least a year before reselling.
And the National Association of Realtors reported that investment property and vacation home purchases accounted for over one-third of all residential real estate sales in 2004, and investment-home sales rose 14.4 percent from 2003 to 2004.
The Realtors trade group also reported that about 3 percent of all home buyers resell the home within a year. “It’s true that some people have made fast profits, but it’s not to be expected. In fact, it can be risky, and prospective buyers need to be aware of the facts before they think about jumping in,” the association’s president said in a statement.
The First American report states that flipping can be a legitimate form of real estate investment, though flip sales can be fraudulent if they involve false information or straw buyers, for example. “Some flip sales are indeed frauds. But not all flippers are fraudsters,” the report states.
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