Login for sale in Boulder, Colorado.
Helen H. Richardson | Denver Post | Getty Images
It is much harder to find a cheap home to buy and turn around in today’s ultra-competitive housing market, but those who can will reap a strong profit.
Although home investment activity fell overall in the third quarter of this year, gross fin yields rose to their highest level in 20 years, according to a new report from ATTOM Data Solutions. The report counted 57,155 single-family homes and condominiums in the United States that were invested in the third quarter of 2020.
A flip is defined as a house that was bought and sold in the same twelve-month period. These changes accounted for 5.1% of all home sales during the quarter, from 6.7% in the second quarter and 5.5% in the third quarter of 2019, according to the report.
The drop in activity is probably due to the severe shortage of homes for sale, especially at the bottom of the market, where pinball machines often play.
Home sales at prices below $ 100,000 fell 22 percent in October year-over-year, according to the National Association of Realtors. Those priced between $ 100,000 and $ 250,000 were basically flat. Meanwhile, sales of more expensive homes, between $ 500,000 and $ 750,000, rose more than 60 percent.
The average price of a flipped house nationwide in the third quarter was $ 240,000.
Although the home investment rate fell during this time, the gross profit of the typical flip (the difference between the average selling price and the average price paid by investors) rose to $ 73,766, compared to $ 69,000 in the second quarter and $ 61,800 in the third quarter of last year, according to ATTOM.
This does not include money that investors have put into the home, such as repairs and renovations, before selling.
Gross profit was the highest since 2000, when ATTOM began tracking this data. The increase in profit boosted the typical return on investment to 44.4%.
The coronavirus pandemic fuels the benefits
ATTOM attributes the gains to the effects of the deadly coronavirus pandemic that shut down much of the nation and world in the spring and has continued to keep people at home until 2020.
“All of this happened in the context of the pandemic, which has created unusual circumstances for the housing market to thrive, and this has included the home business,” said Todd Teta, product manager at ATTOM Data Solutions . “It’s too uncertain these days to say whether the latest trends will continue. But for now, prospects are still looking to move house after a period in which they tended the other way around.”
The profits from investing in the home had declined in the few years before the pandemic because gains in house prices were falling. Demand for housing rose again from May, in part due to accumulated demand in early spring, when home sales almost stopped cold. Then it continued to grow, as the culture of the house created by the pandemic caused more people to want bigger houses in the suburbs to work and go to school.
Record low mortgage rates have also brought out more buyers and made it more competitive for pinball machines. Approximately 57% of pinball machines use all cash, but they cannot always outperform those who use funding.
“Low interest rates and low inventory have made flip acquisitions challenging, leading to a 50% reduction in the number of flips we are currently managing,” said Vipin Motwani, CEO of Iron Gate Development in the Washington metropolitan area. “However, at the same time, these same two factors have also led to an increase in house prices, which in turn has led to a price increase of 5% to 10% over the initial projections.”
Looking locally, investors experienced the largest annual increases in profit margin changes in Raleigh, North Carolina; Phoenix; Kansas City, Missouri and Las Vegas.
The smallest profit margins were in Boulder, Colorado; Corpus Christi, Texas; Hilton Head, South Carolina; Reno, Nevada and Killeen, Texas.
The highest gross earnings, measured in dollars, were in San Jose, California, $ 290,000; Ventura, California, $ 180,000; Bridgeport, Connecticut, $ 177,500; Los Angeles, $ 161,500, and San Francisco, $ 158,500.
The youngest were in Corpus Christi, Texas, $ 14,817; Hilton Head, South Carolina, $ 24,000; Killeen, Texas, $ 26,197; El Paso, Texas, $ 27,116, and Lubbock, Texas, $ 28,869.