What Has Chicago Investors Flipping?

by James F. McClister

A new report from Redfin details the state of house flipping in the country, and what that might mean for the immediate future of the industry.

In 2013, while home prices were still being driven up by persistent investor interest, residential properties were being flipped for gains averaging over $90,000, the highest ever, according to a recent report from Redfin. The unique market, which has since struck a more even balance between buyers and sellers, is no longer so conducive to entrepreneurial and amateur flippers, but there are some areas in the country still rife with flipping activity.

In Chicagoland, flipping activity remains relatively high; though, not necessarily on the rise. Redfin’s research found the city is on pace to match 2013 activity levels.

The news should bode well for hopeful flippers, considering average gains from flipped properties exceeded $86,000 last year.

Across the Nation

The hot flipping market of 2013 was the culmination of several years’ worth of price increases and foreclosures, which drove high gains and lead to an explosion of interest in house flipping. However, the practices, prices and inventory levels were not enough to sustain such a market and, as a result, activity has taken a hit.

Redfin’s meticulous investigation of flipping activity throughout its served-markets delivers several useful industry insights, such as:

  • The estimated average gain from flipped home sales in 2014 will be roughly $87,000, nearly $3,000 less than in 2013 but still $15,000 more than in 2012.
  • In 2008, as a result of the increasing number of foreclosures, bank-owned properties made up a substantial portion of the houses being flipped. In 2013, only 35.2 percent of flipped properties were bank-owned.
  • Redfin estimates that more than 58,000 homes will be flipped this year, falling well short of the 67,000 flipped in 2013 or the 101,000 in 2005.

Average Homeowners Are Taking the Hit

Prior to 2006, when home flipping activity was still following the trajectory of the exponential price gains taking place throughout the industry, flippers were anybody who wanted to make more money. After the bubble popped, things changed drastically. Banks started eating up inventory, and for years the majority of flipped properties were bank-owned. In 2013, with the recovery effort well under way, banks started selling off foreclosed properties and again investors took an interest in real estate.

“In 2005, homebuyers could easily access zero-down financing, which led to heightened activity from amateur investors who bought several homes without any upfront costs, and who planned to resell them at a profit,” Nela Richardson, chief economist for Redfin, says. “When the market crashed, those buyers were left in a lurch.”

Now, Richardson says, flippers consist of mostly developers, corporate investors and the all-cash buyers who know what to look for in a potential renovation property. Big increases to home sales have opened up considerable opportunities for these clever flippers, but Richardson warns that heavy flipping activity could hinder long-term gains for average homebuyers.

Through sweat equity, which refers to the appreciation of a property as a result of upkeep, traditional homeowners can usually increase the value of their home over the course of its ownership. In a pre-crisis market, flippers and homeowners co-existed well. However, with the market suffering from a consistently high demand and conversely low level of inventory, it is exceedingly difficult for homeowners to see additional value in their property.

As the market continues to stabilize, more homeowners will begin searching for profits in selling, but for the time being house flipping will continue to grow under developers and investors.

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