Surge in US home flipping

The very risky and controversial subject of home flipping is being discussed at great length by US investors and US homeowners. This process is defined as the purchase and sale of a property within six months with many investors looking to exploit mispricing of properties and resell at more realistic levels. Recent data suggests that there has been a major surge in home flipping transactions since the first half of 2011, up 74% in the first half of 2012, but what does this tell us about the market?

Fear and greed

While there is no doubt that the US property market is showing signs of life, many people are still drowning under a sea of debt and looking to offload their properties “at any price”. We’ve also seen a number of foreclosures which is perfect food for the “flippers” with both parties looking for a relatively quick transaction for their own specific reasons.

The subject of mortgage debt, foreclosures and financial problems will blight the US economy and the US property market for many years to come. However, there are signs that the number of foreclosures is falling, maybe we are over the worst in the short term and perhaps the flippers have had their day for now?

What kind of returns are flippers creating?

RealtyTrac, a US data firm, has released an array of data into the market confirming that the average gross profit on a single family home flipped in the marketplace rose from $5,321 in the first of 2011 to an incredible $18,391 in the first half of 2012. Even though there are other costs to take into account, on the surface these do seem to be fairly attractive returns.

Quote from PropertyForum.com : “The foreclosure process in the United States should be speeded up to release much needed properties onto the market which is suffering from a lack of supply, according to real estate data firm RealtyTrack.”

The reality is that while many flippers have been in the market for some time and gained experience, there are also other individuals who see this as “easy money” when that is not always the case. The trick with regards to US home flipping is to keep an eye on each and every individual market, follow the foreclosure market very carefully as well as underlying demand in specific regions. The average flipper would appear to have paid a 5% discount on the “fair” market value of their investment and then within six months sold this on at a 1% premium to the “fair” market value.

Is this legal?

While many people criticise the short-term buying and selling of property the fact is that this is all legal and above board. There is no way that the US government, or indeed any other government around the world, could control short to medium term trading opportunities without introducing an array of draconian measures. In many ways this particular type of transaction keeps the market flowing, in some ways it does eventually lead to more “fair pricing” although in the short-term it can lead to some volatility.

It’s also worth noting that not every flipper transaction will lead to a profit and indeed many will be left with properties which are potentially unsellable in the short term. This is the downside of flipping homes in the US, and indeed around the world, but this is not something which is often discussed in public because many investors prefer to keep their “difficult” investments to themselves.