Falling prices and higher mortgage rates create ‘no simple path to quick profits’
Estimated reading time: 8 minutes
Home-flippers who turn eyesores into eye-catching homes are losing a lot more sleep, as hefty profit margins declined for the fifth time in six years – and more are losing money.
Nationwide, the average home-flipper – those who buy, renovate and resell homes within a year – reported a 26.9% return on their investment in 2022, down from 32.6% in 2021 and 41.9% in 2020, according to ATTOM Data. The profit figure is based on the home flipper’s purchase price and the sale price, and does not include renovation costs, property taxes and mortgage interest, which will further eat at the return.
In California, the average home-flipping profit was much worse, a dismal 14.9% in 2022 compared to 20.5% a year earlier.
And nine of 12 cities reviewed in California failed to top the 20% profit margin last year, including three with single-digit returns – Santa Cruz, San Luis Obispo and Sacramento (see table).
“Last year, home flippers throughout the U.S. experienced another tough period as returns took yet another hit,” says Rob Barber, chief executive officer at ATTOM. “For the second straight year, more investors were flipping but found no simple path to quick profits.”
MORE HOMES FLIPPED BUT MUCH SMALLER PROFITS
More than 407,000 homes were flipped nationwide in 2022, the most since at least 2005. It’s a 14% increase from a year earlier and up 58% from 2020.
California had 33,650 flipped homes in 2022, a 55% increase from a year earlier.
But the home-flipping bubble could definitely pop, as home-flippers inspired by HGTV and DIY shows could learn the reality of such risks.
And that could have a chilling effect on an already cool housing market, where 8.4% of homes sold in California in 2022 were flipped properties. With fewer flipped homes, the already critical shortage of homes could wither further.
“Indeed, returns are now at the point where they could easily be wiped out by the carrying costs during the renovation and repair process, which usually accounts for 20% to 33% of the resale price,” Barber says. “This year will reveal more about whether investors decide to find different ways to profit from home-flipping or take a step back and wait for conditions to get better.”
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ATTOM: Average profit of flipped homes by percent and in dollars for March 2023 vs. a year ago
| Metro | % return on investment 2022 | Profit in dollars | % return on investment 2021 |
|---|---|---|---|
| California | 14.9% | $87,000 | 20.5% |
| Bakersfield | 40% | $80,000 | 48.7% |
| Fresno | 36.9% | $93,000 | 37.1% |
| Los Angeles | 12.7% | $100,000 | 17.0% |
| Riverside | 18.1% | $98,750 | 26.2% |
| Sacramento | 9.4% | $45,000 | 13.8% |
| San Diego | 18.9% | $128,250 | 21.5% |
| San Francisco | 18.6% | $173,250 | 22.7% |
| San Jose | 20.5% | $242,625 | 24.5% |
| San Luis Obispo | 9.2% | $70,875 | 15.7% |
| Santa Barbara | 11.9% | $83,000 | 22.8% |
| Santa Cruz | 8.5% | $82,500 | 14.0% |
| Santa Rosa | 17.3% | $115,911 | 20.7% |
**Important note: ATTOM Data’s profit figure is based on the home flipper’s purchase price and the sale price, and does not include renovation costs, property taxes and mortgage interest.
‘PRICES MAY HAVE MORE ROOM TO FALL AND (INVESTORS) WANT TO CUT THEIR LOSSES’
Basic math details that home flipping can be a money-losing practice. In fact, about one of every 10 homes sold by investors in California lost money in March 2023, according to Redfin. In Sacramento, about one of every five (20%) investor-sold homes lost money, the highest percentage in California and about the national average.
Blame higher interest rates – which affects credit card interest and mortgage rates – fast-rising labor and materials costs, and lower prices than when the homes were purchased for shattering the dreams of many home flippers.
“You might wonder why investors don’t just wait to sell the housing market bounces back,” says Sheharyar Bokhari, senior economist for Redfin. “Many long-term investors who rent their properties out are doing that, but many flippers, especially those who bought recently, can’t afford to. Holding onto homes that aren’t producing income can be expensive because the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases. Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses.”
California’s median-home price had a slight increase in March from February, but was off 7% from a year ago, according to the California Association of Realtors. And in home-flipping, every dollar can make the difference between a profit or losing money.
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Redfin: Percent of investor-owned homes sold for a loss, average percentage gain and profit in March 2023
| Metro | % of investment homes sold for a loss in March ’23 | Average % gain for investment homes sold | Profit for investment homes sold |
|---|---|---|---|
| Anaheim | 8.4% | 39.1% | $323,250 |
| Los Angeles | 8.3% | 32.8% | $236,500 |
| Oakland | 14.5% | 40.0% | $260,000 |
| Riverside | 12.2% | 38.1% | $152,500 |
| Sacramento | 20.2% | 27.3% | $109,250 |
| San Diego | 11.4% | 47.1% | $306,000 |
| San Francisco | 13.0% | 30.7% | $417,000 |
| San Jose | 9.7% | 32.0% | $370,000 |
**Important note: Redfin data for this report includes all investor-owned properties sold, from flipped homes to those owned for many years.
BIG DOLLARS DESPITE SMALLER PROFITS IN BAY AREA
The four hardest-hit housing markets nationwide for investor-owned properties that sold in March were in California. San Francisco’s median sale price of homes sold by investors plummeted 30% to $1.8 million in March, the largest annual drop among the metro regions surveyed. Sacramento, San Jose and Oakland reported 13-14% lower prices.
Despite the decline, the Bay Area with its million-dollar homes generated the largest profits for sellers, according to ATTOM. The average San Jose home-flipper enjoyed a gain of $242,625, followed by San Francisco at $163,000. The profit margins were 21% and 19%, respectively.
According to ATTOM, the biggest percentage return on investment for home flippers was in the Central Valley, one of the most affordable housing markets in California.
Despite low incomes, almost two of every five (39%) households in Bakersfield and Fresno could afford the median-priced home in 2022, according to the California Association of Realtors. Statewide, slightly more than one of every five (21%) households could purchase in their respective regions.
So, home flippers enjoyed a 40% profit in Bakersfield and 37% in Fresno – about $80,000 and $93,000, respectively, according to ATTOM. The smallest profit margin was $45,000 in Sacramento, where home prices soared during the first few years of the pandemic and have plummeted since spring 2022.
What home-improvement projects pay off the most down the road? Uh, go see what your house looks like from the road
Whether you’re a home flipper or a homeowner, knowing the most cost-effective home-improvement projects when selling a house is good.
And in a world where first impressions matter, garage doors, stone veneer and a good-looking front door pay off down the road, according to the annual Cost vs. Value report by Remodeling magazine. For example, adding stone veneer will cost, on average, about $11,000, but homeowners will get every dollar and a few more back when selling.
Installing an electric heating and ventilation system actually topped the list. But the figure includes removing an oil furnace, a fast-growing trend on the East Coast and Midwest but not much of an issue on the West Coast.
The closely watched report chronicles a dramatic change in recent years, with major additions and remodels generating less than 50% returns for sellers. Instead, buyers are more about a comfortable and functional bath and kitchen rather than paying the price for a large renovation project, which they may not even like.
So, hold off on those bathroom and bedroom additions that pay back less than 30 cents per dollar spent, says Todd Tomalak, of Building Product Research and Advisory Practice for Zonda, the publisher of Remodeling.
Tomalak also cautions home flippers and homeowners that the survey was completed in fourth-quarter 2022, when much-higher mortgage rates and surging inflation dominated compared to a year earlier.
“It was the darkest hour of 2022 and for real estate in a decade,” Tomalak says. “But it provides an important perspective to capture. We learn what projects maintain a premium to homebuyers when times are tough, and they can’t afford everything on their wish list.”
Another lesson learned? First impressions, like a new front door or a garage door, matter. A lot.
Check out Remodeling’s Cost vs. Value complete list of projects and their returns.
| Project | Job cost | % of cost recovered |
|---|---|---|
| New garage door | $4,302 | 103% |
| Manufactured stone veneer | $10,925 | 102% |
| New front door | $2,214 | 101% |
| Siding replacement | $16,348 | 95% |
| Minor kitchen remodel | $26,790 | 86% |
| Replace vinyl windows | $20,091 | 69% |
| Bathroom remodel (midrange) | $24,606 | 67% |
| New roof | $29,136 | 61.1% |
| Major kitchen remodel (midrange) | $77,939 | 42% |
| Primary suite addition (midrange) | $157,855 | 30.0% |
Source: Remodeling
