Despite easing a bit in recent weeks, home prices have skyrocketed and demand for residential property is enormous. Market conditions have produced a decided drop in the number of real estate investors purchasing and flipping single-family homes, according to research from ATTOM.com. Gross profit on a typical home flip—the difference between the median sales price and the median price paid by investors—dipped in Q2 of this year to $63,500, translating into a 37.8% return on investment compared to the original acquisition price. Researchers at WalletHub conducted a study to determine the best (and worst) metropolitan areas for those intent on remodeling a rundown home and turning profit.
"Don’t get your hands dirty until you’ve learned a thing or two about real estate, construction and how much damage your project could do to your wallet," WalletHub analyst Adam McCann suggests, introducing the study, which compared more than 170 U.S. cities across 26 key indicators of market potential, cost, and quality of life. Metrics observed range from a metro's median purchase price and average debt-to-income ratios to average room-by-room remodeling costs and its number of real-estate agents per capita.
Overall, Sioux Falls, South Dakota; Missoula, Montana; Peoria, Arizona; Nampa, Idaho; and Tampa, Florida came out on top.
The other end of the scale included Bridgeport, Connecticut, at No. 168; San Francisco; Yonkers, New York; Oakland, California; and, in the 170 place, Newark, New Jersey.
Pittsburg and Philadelphia, Pennsylvania; Wilmington, Delaware; Cleveland, Ohio; and Buffalo, New York recorded the highest returns on investment. The lowest cost of full-home remodeling was found in Little Rock, Arkansas followed by Memphis, Tennessee.
Duke University Professor of Economics and real estate investor Brittany Cousins, who spoke to WalletHub, says there are two major considerations for investors who wish to fix and flip, and those who engage should prepare "for their job to be both art and science."
"It is also a business, which means flippers must be able to not only make decisions on the fly but also remain aware of the financial implications of those choices. Flipping a house is about making it beautiful enough to attract a buyer at a good price, but it is also about making responsible decisions about the improvements that you make.
Peter Smirniotopoulos, Real Estate, Urbanism, and Law Professor at Seattle University says the ideal investor is "a very experienced [agent] in the market area and specific sub-market, paired with an equally experienced general contractor or remodeler who understands how long capital improvements actually take and their costs."
"Particularly in the currently over-heated residential markets being experienced throughout the U.S. at present, house-flipping is neither for the faint-of-heart nor for someone who wants to take this on as a side-gig."
Smirniotopoulos also outlines what he believes are the factors one should consider when eyeing a potential fix-and-flip property. Those include, in order of priority, "submarket conditions; structural and systems integrity (including roof systems and draining issues); unit configuration (e.g. is the subject site a 1.5BR/1ba SFD in a 3-5BR/3ba SFD market); age and features of existing appliances; existing closets and storage; adequacy of off-street parking relative to comps; availability and cost of Purchase Money financing; and general market conditions.
None of the experts who commented believe home flipping is a contributor to any overheating housing markets, and, in fact, Florida International University Interim Dean and Finance/Real Estate Professor William Hardin says the practice benefits communities by, in many cases, removing blight.
"Flipping houses that require renovation and repurposing is actually a valuable part of the recycling of housing," he said, "as houses and buildings do not last forever unless maintained, updated, and renovated."
The full results are available at WalletHub.com/edu.