Is House Flipping Back?

During the housing boom, the strategy of buying a house, fixing it up and selling it for a profit, nicknamed "house flipping," became incredibly popular. It flourished because real estate prices were rising so quickly. Often, even without any renovation, the homes could have sold for more a few months later, just due to high appreciation rates. Of course, once home prices began suffering, flipping did as well. It's pretty hard to flip a house when its market value is declining.

But an article today from Bloomberg suggests that the craze may be back. Foreclosure auction deals are bringing flippers back to the market, hoping to make a quick buck by buying a dilapidated defaulted property, fixing it up, and selling it for more. Could it work in this environment? I'm skeptical.

Here's Bloomberg reporting:

Homes with punctured walls and missing appliances draw multiple offers from professional investors at auctions in foreclosure-ridden states such as Arizona, California, Florida and Nevada. Competition is so stiff that experienced flippers such as Sergio Rodriguez and Brian Bogenn look back with nostalgia at last year, when they turned over 48 residences in the Phoenix area.

Interestingly, the markets where foreclosure deals are the most attractive might also be the same where it's hardest to sell a flipped house since there's so much housing inventory available.

Bloomberg turns to "Flip This House" TV show creator Richard Davis to explain flipping's resurgence:

Davis, now chief executive officer of Charleston, South Carolina-based Trademark Properties, said he has fixed and sold 25 properties since returning to the business in October and is filming a new series about multimillion-dollar homes built during the boom that he is buying, repairing and selling for half their original price.

"The professionals will make more money in a down market than they ever made during the boom," Davis said.

I can definitely see how flipping could make sense when it comes to higher end properties, since the rich are recovering fairly well from the recession. There could be some demand for deals for that segment of the population, but I have trouble believing that average Americans are exhibiting enough demand to make flipping pay off.

Think about flipping a moderately priced home in a market like Florida. Imagine you buy a home at auction for $100,000 that was once worth $200,000. It's a dump, so you renovate it, at the cost of $10,000 to $20,000. You would then hope to sell it for more. But meanwhile, dozens of similar foreclosures become available at auction each month at similar prices. Bear in mind that few buyers are even in the market for a home, and those few are searching for ultra-affordable deals in this economic environment. I just don't see them paying a premium for a home that they could renovate gradually over the next several years as the economy improves.

So flipping homes in this environment seems like a dangerous game. The housing market remains very fragile. Foreclosures are still high, and the government's home buyer credit might have already brought forward most of what little demand there was. So these flippers could be faced with having to hold onto these homes until foreclosures significantly lessen in number and/or unemployment declines significantly to help build consumer confidence. Neither outcome is likely this year.

Certainly, some flippers will be savvy or lucky enough to stumble upon will buyers here and there. But this is hardly an environment where anyone with a little home improvement expertise should begin buying homes again hoping to make a quick buck. At best, professionals could see some success. But even there, a great deal of uncertainty continues to cloud the market.