First, fewer homes are being flipped. The recent numbers, which reflect flipping activity in Q1 2021, show that total flipping volume is at its lowest point since 2000. Currently, only one in every 37 real estate transactions is a flip, which is down nearly 5% from Q4 2020 and down 7.5% from the same period a year earlier.
Because flipping houses relies so heavily on the macro-economic climate, it makes sense that activity is declining. With inflation fears rising, uncertain interest rates, and pending foreclosure increases, it’s difficult to tell what the housing market may look like a few months down the road.
But even for the flippers who are continuing to operate, performance is also taking a hit.
Gross profit was down to $63,500, down from $71,000 in Q4 of 2020—a decline of nearly 11%. Profit margins also dipped down to 37.8% from 41.8% in the previous quarter.
Why are margins declining?
The decline in margins is likely due to three factors:
- The nearly universal increase in property prices across every region and property type is making it more challenging for flippers to buy properties on the cheap.
- With extremely low inventory, there is more competition for “fixer uppers” from regular home buyers. It appears that more traditional home buyers are willing to take on the risk and work of rehabbing a property if it means they can actually put something under contract.
- The price of materials and labor is going up, which will squeeze margins.
That said, any completed flip will be listed in a very advantageous environment and is likely to fetch a premium price.
With inventory starting to tick back up and lumber prices falling more than 40% from their peak in May, it will be interesting to see if flipping activity and profits recover in Q2.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.