What it takes to make money flipping homes in a crazy real estate market

By Anna Bahney, CNN Business

More people are flipping homes, but they are making less of a profit.

Investors looking to get a piece of skyrocketing home prices by buying a home, fixing it up and then quickly putting it back on the market, aren’t getting quite the returns they used to.

Finding a home to buy in the first place is more difficult, with record low inventory of homes and foreclosures. And rising competition for whatever homes are available means even shoddy homes in terrible condition are selling for a fortune. Plus, materials and labor shortages have made fixing up a place more costly.

There were 94,766 single-family houses and condominiums in the United States that were flipped in the third quarter of last year, the most homes flipped in a quarter since 2006, according to real estate data provider Attom.

But profits remained below where they were a year ago.

The gross profit on a typical home flip transaction was $68,847 in the third quarter, down from $70,000 a year before, according to Attom. That’s a return on investment of 32.3%, down from 43.8% a year earlier, its lowest point since 2011.

The decline in profit margins is largely because many investors bought when home prices had shot up, then sold when prices were rising more slowly, according to the report.

Still, a 32% profit before expenses is not turning off investors. Here’s how they’re making it work.

Know the market

Danielle Green has been flipping homes in Baltimore since 2018. She buys homes from the city at auction and has seen a big difference in the availability of properties and their cost.

“I used to be able to buy a home for $5,000 or $10,000 at auction prior to the pandemic,” said Green. “Now they are going for $20,000 or $40,000.”

Fewer properties were available as the auction process slowed down during the pandemic, Green said. Also, auctions that were once held in person moved online, which enabled more buyers to bid. And, Green said, there is a knock-on effect as investors in nearby cities look for cheaper homes to flip.

“Some investors have been priced out of their areas, so they come to Baltimore from Washington, DC, or Philadelphia and they drive up our prices,” Green said.

With so few single-family row homes available, Green has begun buying small multi-family homes with three or four units. While she sells some of her properties, she keeps others to rent out in order to keep some money coming in.

“Before the pandemic, I was doing three or four deals a year,” she said. “Now I’m down to one or two big deals a year. It is doable. You have to know your profit margin and work to keep it.”

She has not been immune to labor shortages and supply cost increases, but Green said she feels she has an advantage over investors from other areas because she’s lived in Baltimore and knows which neighborhoods will carry what prices.

“Investors come in and think it is easy to buy because the houses seem cheap — they’ll think buying a shell [of a house] for $40,000 is a deal,” she said. “But I know that’s not the best neighborhood. You have to know the market and understand what you’re buying.”

Stick to a firm budget

Leah Wensink, who’s been flipping since 2014 and is now working in Harrogate, Tennessee, said she paid the most she ever had for a flip this year.

Wensink bought a home for $170,000 last June and said the only way she will be able to make a profit is that she paid cash for it. Not having to make monthly payments gives her the breathing room to do some of the work herself or find more affordable alternatives to get around price hikes in labor and supplies. She expected it would take her nine months to finish, but Covid-related delays have pushed it closer to a year.

Wensink said her approach to profitability is pretty simple. She draws a hard line on how much money she is willing to spend.

“If I stay under that amount, I know I can make money,” she said. “I don’t spend a lot of time planning down to the Nth degree my margins. That’s just not what I want to do with my life. But I do a lot of research to see what’s happening in the market. And I like to give myself a huge cushion so that if I don’t end up selling it for this higher amount, then I can always lower it.”

But Wensink is worried about making her money back on this current house, her biggest flip to date.

“This house was not livable when I bought it,” she said. “It had water damage. And so I’ve had to come in and just take care of those things right off the bat and tear everything out. I am worried about it because I don’t think people are going to see half the work that’s been done in this house, which is the bummer of buying a house that needs this much work.”

Find solid partners

On one of his first flips in 2017, Lukas Vanagaitas lost his life savings. So he brought in a lending partner, Kiavi, to help finance his flips. That helped him grow his real estate business, Horus Homes, from four or five transactions a year to 100.

“In my first year investing, everything that could have gone wrong went wrong and I ended up losing $100,000,” Vanagaitas said. “I made a lot of mistakes and had to start back at square one. It took some time before I got back on my feet and I had to live in my flips while I remodeled them.”

He relocated from Houston to St. Petersburg, Florida, and now works with Kiavi, a lender which offers bridge and rental loans to real estate investors along with a platform to track projects.

“They are there for me with an answer to everything from ‘What do you think about this?’ to ‘How will it help us?'” he said. “We’ve never missed a close, usually closing in ten days or less.”

But this frenetic market has made every decision a little harder. “It is a very hot market where there are multiple bids on every home on any given day.”

He said the continued demand for housing, especially in Florida, is bringing in more investors. But he doesn’t see a crash looming because so many people have equity. The brisk market means sometimes the plans for a property change very quickly.

“We have a duplex we wanted to keep as a rental,” he said. “But we can get $150,000 more than its after repair value if we sell it. With the cash we bring in, we can buy two rentals.”

CNN’s Zachary Wasser and Sean Clark contributed to this report.

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