House flipping is an awesome investment plan in theory: Purchase a fixer-upper that needs a little TLC, do some renovations, and then sell it for a profit.
Even though sale prices are sky-high lately and bidding wars — a dream for fix-and-flip investors — are the norm, there are reasons that the house flipping trend has cooled off. Let’s take a look at what’s making flippers put down their tool belts for a bit.
You don’t hear the word “cheap” or “bargain property” much in real estate anymore. There’s just too much demand and too few houses for sale. And in some of the more pricier markets, properties are far too expensive to begin with for much flipping to happen.
“There has been no real flipping in the New York City market for years,” says Frederick Warburg Peters, the CEO of Warburg Realty in New York. “The prices are too high and the market too unpredictable.” He notes that those who bought in 2015 and 2016 are still losing money when they go to sell in today’s market.
House flipping is not for the faint of heart. Yes, any type of real estate investment has inherent risk, but it’s usually a long game. For flippers, it’s all about risk in the short term: Purchase a cheap property quickly (all-cash offers are key here), renovate at breakneck speed, and sell as soon as possible. If all goes well, you’ll make a tidy profit within just a few months. But if things don’t go well, you could get stuck with a money pit or a house that sells below your profit margin.
“Flipping has become more difficult over the last few years because the margins have become too small or risky,” says Michael J. Franco, a broker at Compass. “Buildings are more difficult to renovate and the costs have gone up significantly. He says that flipping has become even more of a challenge for investors because the profit margins have shrunk.
Even if you’re a DIY warrior, you’re going to need a larger skill set — not to mention a much bigger tool box — to get into flipping houses. When you have that much cash tied up in a property, you don’t have the luxury of moving slowly on a renovation so you can learn as you go.
It’s an understatement to say that a 30-minute house flipping shows gloss over most of the hard parts of the process. More often than not, projects go above and beyond the proposed budget and timeline — and that’s with a team of contractors on the job.
The supply chain is unreliable.
The supply chain was and still is severely impacted by the pandemic. There are delivery delays for everything from toilet paper and diapers to tools and construction materials, and they’re expensive when you can get them. Plus, there’s been a labor shortage, so good luck with finding contractors. The situation has not only extended renovation timelines, but it’s busted budgets, too — and it all takes a huge bite out of a flipper’s potential profits.
“[Flipping] also depends on a steady supply chain to enable the investor to move quickly before costs mount up,” says Peters. “With today’s uncertainty, investors here hold for the longer term.” But flipping is very much about the short term — investors want to get in and get out of a property as soon as humanly possible.
Flips aren’t always a hit with buyers.
House flipping shows make it a point to show the delighted reactions of potential buyers at the open house. This is what flippers aim for in real life, but the truth is, the finished home might not wow everyone.
Flippers, after all, are not going to be the ones living in the home, and many will renovate accordingly. It’s not about cutting corners per se — although that’s exactly how some flippers get a bad rap. Rather, it’s about opting for the cheaper finishes and appliances to get a better bang for their buck.
“For buyers on the high end, the level of quality of finishes is much more important. Higher-end buyers look closely for quality and want name brand architects and finishes,” Franco says. However, entry-level homes with standard finishes do as well as those with higher-end finishes, which is something a flipper should keep in mind.
It’s been a wild ride for the real estate market, and it’s tough for buyers to find good properties let alone snag a deal. It stands to reason that until the market cools off and the supply chain starts behaving itself again, the house flipping trend will be a flop.