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Flipping profits down amid changing homebuyer wants

Home-flipping profits in 2020 declined for the third year in a row, and overall return on investment (ROI) is at the lowest point since 2011, according to a new study from ATTOM Data Solutions. This profit loss is an anomaly in what’s otherwise been an impressively strong market during the economy-crippling COVID-19 pandemic.

How the Numbers (Don’t) Add Up

Homes flipped in 2020 typically generated a gross profit of $66,300 nationwide, which was measured as the difference between the median sales price ($230,000) and the median amount originally paid by investors($163,700). That was up 6.6% from $62,188 in 2019, and puts it at the highest point since at least 2005.

The typical gross flipping profit in 2020 translated into a 40.5% return on investment compared to the original acquisition price. The latest ROI (before accounting for mortgage interest, property taxes, renovation expenses and other holding costs) was down from 41.5% in 2019, and 46.4% in 2018. Profit margins also suffered because the median value of the flipped homes rose more slowly (8.4%) than the median price investors paid to purchase properties (9.1%). 

The number of homes flipped in 2020 represented 5.9% of all home sales in the U.S.—down from 6.3% in 2019. The number of homes flipped by investors also declined in 2020, which marked the first time since 2014 that both measures decreased annually. Home flips as a portion of all home sales decreased between 2019 and 2020 in 126 of the 198 metropolitan statistical areas (MSAs) analyzed in the report (63.6 percent). Nine of the 10 biggest decreases in annual flipping profit rates among MSAs occurred in the South and West.

A few more flipping profit stats from ATTOM’s study include: 

  • Aside from San Antonio and Houston, the biggest decreases in flipping rates in 2020 across MSAs with a population of 1 million or more were in Indianapolis, Indiana (-19.3%); Las Vegas, Nevada (-19%) and Austin, TX (-18.4%).
  • Home flipping rates increased from 2019 to 2020 in 72 metro areas with sufficient data to analyze (36.4%). The largest annual increases in 2020 in the home flipping profit rate came in Norwich (38.2%) and Hartford (31.1%), Connecticut; Boulder, Colorado (29%); Albuquerque, New Mexico (26.9%) and Anchorage, Alaska (26.2).
  • Nationally, the percentage of flipped homes purchased with financing dipped in 2020 from 42.3% in 2019 to 41.7%, and from 41.8% in 2018, the first decreases since 2010.
  • Among the 53 markets in the U.S. with a population of 1 million or more, those with the largest gross-flipping profits in 2020 included San Jose ($274,000), Los Angeles ($151,500), San Diego ($147,750) and San Francisco ($171,000), California, as well as New York City ($152,000).
  • The lowest gross-flipping profits among metro areas with a population of at least 1 million in 2020 included Charlotte ($46,000) and Raleigh ($30,000), North Carolina; Houston ($37,174) and San Antonio ($39,867), Texas; and Las Vegas, Nevada ($45,600).
  • Home flippers who sold homes in 2020 took an average of 181 days to complete the flips, up from an average of 177 days in 2019 and 178 days in 2018.

Americans Want to Move, Want More Indoor and Outdoor Space

After a year stuck inside our existing homes, three rounds of government stimulus for many Americans and three viable options for COVID-19 vaccinations rolling out, people are ready to move. In fact, one in five homeowners say they’re planning to move within the next year, and 56% of consumers surveyed in December 2020 said they plan to move in 2021. 

But buyers in 2021 don’t want what they wanted in 2020. The pandemic has deepened and sometimes tested Americans’ relationships with their homes. Remote work, distance learning, DIY remodels and everyone forced to eat at home upended some people’s previous preferences regarding features and amenities. 

The following questions were asked in a January 2021 survey of 2,085 Americans about their attitudes and preferences related to homeownership. Respondents were 55% female and 45% male, with an average age of 38 years old and a range of 18 to 68 years old. The first set of answers were charted for people age 40 and younger, while the second question shows answers from respondents of all ages.

Fix-and-Flip-and-Profit, Post-Pandemic

Would-be flippers would be wise to take buyers’ evolving wants into account when investing and planning their upgrades. With inventory at record lows and demand not letting up, buyers flush with savings and stimulus money are willing to spend on roomy homes in hot areas. According to a study by Kiplinger, they were especially interested in the following amenities (identified by what percentage of buyers said they wanted each feature):

  • Laundry room (91%)
  • Energy efficient appliances/windows (89%)
  • Patio (87%)
  • Ceiling fan (85%)
  • Garage storage space (85%)
  • Exterior lighting (85%)
  • Walk-in pantry (83%)
  • Hardwood floors (83%)
  • Master bedroom walk-in closet (percentage not reported)
  • Eat-in kitchen (percentage not reported)
  • Dining room (percentage not reported)

When choosing investment properties and determining which projects will reap the most ROI, take into account the following information published in the National Association of Home Builders’ BuilderBook, “What Home Buyers Really Want, 2021 Edition.”

  • 67% of buyers want a single-family detached home, 15% want a townhouse and 8% want to buy a multifamily condo.
  • 60% of buyers want a newly built home over an existing home, the largest share since 2007.
  • Buyers expect to pay (or recently paid) a median of $264,634 for a home. 
  • Buyers want a median of 2,022 square feet of finished space, about 8% more than the 1,877 square feet they currently have. Because 21% of buyers acknowledged the arrival of COVID-19 had led them to desire larger homes, it is reasonable to conclude that the median size desired would have been smaller in 2020 were it not for the pandemic.
  • There is no majority opinion among buyers when it comes to the exterior design of the home: 32% prefer a traditional home, 24% a contemporary home, 16% a transitional home and 14% a modern home.
  • Home buyers clearly prefer open layouts: 85% want an open arrangement between the kitchen and the dining room, 79% between the kitchen and the family room and 70% between the dining and the family room.
  • For 63% of buyers, the washer and dryer belong on the first floor.
  • Most buyers (52%) prefer to heat and cool their homes with electricity, while 33% prefer to do it with gas. 
  • 51% of buyers prefer to cook with gas, and 39% with electricity. 
  • For water heating, 45% prefer gas and 40% electricity.
  • 46% of buyers want three bedrooms. 
  • The share interested in 4+ bedrooms in 2020 (32%) is smaller than in 2007 (40%). 
  • 47% of married couples with children want at least four bedrooms, compared to only 13% of one-person households.
  • 37% want two bathrooms, 21% prefer 2.5 baths, 26% want more than three and 17% are looking for fewer than two baths.
  • 42% of recent and prospective home buyers prefer a two-car garage over any other parking facility, 18% prefer a one-car garage and 12% want a 3+car garage.
  • When asked if they would prefer a home designed for multiple generations (the buyer plus a younger and an older generation), buyers are evenly split: 39% said yes, 39% said no (with the remainder not being sure). 
  • The preference for multi-generational housing is much more pronounced among minorities: 53% of Latinos, 50% of Blacks and 46% of Asians prefer it, compared to 35% of whites.