Flips Account for a Significant Segment of Current Market
By Carl Medford, CRS
“As seen in the Real Estate Reality Column in the San Leandro Times & Castro Valley Forum, written by Carl Medford”
A report by ATTOM Data* reveals flipping is alive and well and accounting for an increasing segment of the housing market, up to 7.5% for Q1, 2020 from 6.3% in Q4, 2019. The idea behind flipping is simple: obtain a property for less than market value and sell for a higher price. The difference between the purchase and sales price minus expenses is profit. Simple.
Not so much.
The first issue is locating a property. There are currently hundreds of flippers in the Bay Area, each looking for potential homes. Some look for properties in pre-foreclosure, some go foreclosure auctions on the courthouse steps, others search for unpaid taxes while many send letters to homeowners who may want to cash out as quickly as possible. Another group posts signs that read, “We pay cash for houses.”
Whatever the method for locating potential properties, the criteria is always the same: it must be purchased for substantially less than resale value. Therein is the rub: many sellers want to get as high a price as possible, frequently ruling out a flipping scenario.
Some flippers look for homes at bargain basement prices and, after the purchase is complete, immediately put it on the market at a higher price. The majority, however, looking to maximize their profit, will improve the property in some way. While some will do a few renovations such as painting or flooring, others install new kitchens, baths and much more. The goal is always to maximize their profit. Flippers that do a significant volume can get good prices on their upgrades and thus generate larger profits.
The quest for profit, however, has a few pitfalls. While some flippers play by the rules and obtain permits and use licensed contractors, many use unlicensed labor and fail to obtain permits of any kind. The reason is simple: permits and licensed contractors cost more and thus decrease potential profits.
It is a classic case of “Buyer beware” – while some buyers do not care if the upgrades were permitted or done by licensed contractors, others are more risk averse and are not willing to buy so large an investment that may have potential issues lurking behind the sheetrock.
With flips making up a good percentage of the market, buyers must pay careful attention. While a home may seem great at the time, unforeseen issues could ‘flip’ it from great to ugly in a heartbeat.
Carl Medford is a licensed Realtor with Keller Williams Realty and a licensed general contractor. This article is sponsored by the Central County Marketing Association.