Dwindling return on investment is leading investors to rent out properties rather than flip them
Home-flipping activity dropped in the third quarter as returns remained near seven-year lows, according to a new report from ATTOM Data Solutions.
According to ATTOM’s third-quarter US Home Flipping Report, 56,566 US single-family homes and condos were flipped in Q3. That’s down 12.9% from Q2 and 6.8% from Q3 of 2018.
“After an unusually lively flipping market in the spring of this year, the declines stood out as the largest quarterly and annual drops since the third quarter of 2014,” ATTOM said.
Homes flipped in the third quarter generated an average gross profit of $64,900. That’s up 1.8% from Q2 and 3.5% from a year ago. However, that gross profit translated into a 40.6% return on investment compared to the original acquisition price, down from a 41.1% flipping ROI in Q2 and 43.5% in Q3 of 2018. The third quarters average return on investment stood at its second-lowest point since 2011, according to ATTOM.
“After a springtime selling binge earlier this year, the home-flipping business settled way down over the summer amid a continuing scenario of languishing profits,” said Todd Teta, chief product officer at ATTOM Data Solutions. “The retreat back to more normal levels of sales comes amid broader market forces that are making it harder and harder for investors to complete the kinds of deals they were getting as recently as last year. Those forces are keeping profits way down from post-recession highs and show no signs of easing.”
Declining profits on home flips are leading to greater interest in renting out renovated homes rather than flipping them, said Maksim Stavinsky, co-founder and COO of Roc Capital.
“We have been seeing a decline in projected and realized profits for borrowers on projects, despite the fact that borrower financing costs have been meaningfully coming down,” Stavinsky said. “This has led to much greater interest and activity in our rental programs. We expect these trends to continue.”
