House flips pick up steam, but it’s not easy money

House flipping is up 256% in Arkansas, but those involved in buying and renovating a home for a profit say the process is tough and risky in smaller metro areas.

RealtyTrac reports 136,184 single family home flips in the U.S. during the first six month of 2013. A flip is where a home is purchased and subsequently sold again within six months. Nationwide home flips rose 19% in the first half of 2013, compared to a year ago, and they were up 74% from the first half of 2011.

Arkansas reported 923 flips this year, up 256% from a year ago.

The results in Arkansas counties did not gather that much steam, but Pulaski County did make the top 40 metro areas with 245 flips recorded in the first half of this year. Flip activity there rose 195% from the same period in 2012, according to RealtyTrac.

Benton County reported 109 home flips in the six-month period, up 8% from the same time in 2012. However, activity is down from 151 flips recorded in the same period of 2011. Washington County showed 7 flips this year, down from 11 reported a year ago and 38 recorded in the first half of 2011.

Sebastian County had 2 flips so far this year, falling from 5 in the same period of last year and 14 recorded in the first half of 2011. Crawford County also showed 2 flips, but that was an increase from zero recorded in the same period of 2012, according to RealtyTrac.

“While flipping continues to be profitable in most markets, particularly those where the home price recovery is still nascent and a recent rebound in foreclosure activity allows investors to find distressed inventory at a discount, home flipping is tapering off in markets where fewer of those distressed bargains are available,” said Daren Blomquist, vice president at RealtyTrac.

He said about a third of the 100 markets analyzed by RealtyTrac had declining flip numbers. Some of those include longtime perennial hot spots such as
Las Vegas, Phoenix, Southern California and Atlanta.

Blomquist said flipping remains on the rise in more than two-thirds of the markets, including New York, Washington, D.C., Chicago and several Florida metros.

PROFITS VARY
Mike Maxwell, an agent with Crye-Leike Real Estate in Bentonville, said he flips a couple of homes a year and there is no perfect formula for success.

The key to profitability often lies in the price paid, he said. Classic rookie mistakes by investors often include paying too much for the property and underestimating the cost of repairs and the timeline needed for a successful flip.

“In this market, investors need to allow six months to move the home, and that doesn’t necessarily include the renovation timeline,” Maxwell said.

He said a home bought at $100,000, in need of $20,000 in repairs, should bring a sales price of $155,000 to make money for the investor after marketing costs.

“Investors need to know most of the time their investment is tied up in the cost of repairs and carrying costs until that property is sold, or refinanced and kept as a rental. That can be several months,” he said.

Grant Morris of Fort Smith knows how long it can take to complete a house flip in smaller markets. In April 2010, Morris and his wife Lindsey purchased a home with a partner Kevin Childers. It took them 16 months to complete the extensive renovations, most of which they did themselves.

“We spent $20,000 in total renovations and put the home on the market in September of  2011 and it sold in May 2012. It was a two-year commitment for us,” Morris said.

He said given the time commitment of the project, he doesn’t think the partners were justly compensated based on the sales price.

“In my opinion the formula to flip homes the right way is: Buy low, hire the time-consuming work out (staying within budget), remodel as cheap and as fast as you can, remodel to the surrounding neighborhood (don't over do it) and get it back on the market for quick sale,” Morris said.

Nationwide, investors fared quite well with an average profit of $18,391, a 9% gross return over the purchase price.

Investors in Benton County got an 11% return over investment with a flipped price of $114,928, up $10,652 over the average purchase price in the first six months. In Crawford County, the average flip price was $6,645 lower than the purchase amount in the two flips recorded this year. The average purchase price in Sebastian County was $136,500 and the sales price was $121,000, an average net loss of 11%. In Washington County, home flippers lost an average of $7,614 per deal. The average purchase price was $112,614 and the flips averaged $105,000.

Blomquist said nationwide investors who flipped during the first half of the year benefited from buying homes a discount of 5% and then getting a 1% premium sales price over market value.

Maxwell said it’s hard to do in smaller markets like Northwest Arkansas or Fort Smith.

“When the foreclosures dried up in recent years its been very difficult to pull off. But now that bank-owned properties are starting to come back into the market there should be a few more deals available,” he added.

WORDS OF ADVICE
Morris and Maxwell said home inspections are a must and the $400 is small compared to thousands of dollars that could be spent from rot or termites.

“We had to completely gut the kitchen and bathrooms even taking out subfloors, which added to our timeline and costs,” Morris said.

Maxwell said most foreclosures are bought “as is” but a home inspection is still a good idea because the last thing a flipper needs is a costly surprise to derail his budget and his timeline. Maxwell has a contractor’s background so he does a lot of the work himself on the flips he completes.

Morris said looking back he would hire out as much as he could afford to do and still make a profit.

“We would have made about the same amount of money and been done approximately a year sooner if we would have hired the work out,” he said.

Maxwell and Morris said another classic mistake is to overdo the renovations.

“You have to remember that this is not your home, stick to neutral colors and keep the finishes within budget or you will see your profits slip away,” Maxwell said.

Morris urges prospective investors to keep the renovations within the scope of the rest of the neighborhood.

“We would like to flip again in the future, if the opportunity is right,” he said.