Home flippers were busy in 2022, but profits sank
The number of homes flipped last year reached a two-decade high, but average gross margins declined, and market conditions may deter flippers in 2023.
Key points:
- An ATTOM report found more than 400,000 houses and condominiums were remodeled and resold in 2022, the highest total since 2005.
- At the same time, gross profit margins dropped to the lowest level in 15 years.
- The South and West regions had the biggest increases in home flipping, with San Jose flippers pulling in nearly $250K in gross profit.
Home flipping was more popular than ever in 2022, despite rising interest rates and lower profits.
A recent report from ATTOM estimates 407,417 single-family homes and condominiums were renovated and resold in 2022. That's up 14% from 2021 and was the highest total since 2005.
However, gross profit margins from those flips sank to their lowest point in 15 years. According to the report, homes flipped in 2022 typically generated a gross profit of $67,900, down 3% from 2021. That translates to a 26.9% return on investment, down from 32.6% in 2021 and 41.9% in 2020.
Flippers may pause as margins get thinner
As margins decline, renovation and repair costs can minimize or erase returns, said Ron Barber, CEO of ATTOM. If interest rates remain elevated and home prices don't drop dramatically, flippers can expect to continue feeling the squeeze.
"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," Barber said.
Agent Natalie Schanne with Samson Properties in Princeton, NJ, says many of the home flippers she's met "lost money on their deals for the first time just recently," and house flipping is on the decline as more people opt to turn homes into rental properties.
"On average the flippers are getting less than before," she says. "And instead of getting 20 or 30 offers they're getting maybe one or two."
She expects the trend to continue. "There are fewer flipped houses this year because the contractors were so in demand that the prices to fix things up got very expensive."
Flipping growth, profits vary dramatically by market
Much of the home-flipping growth last year happened in the South and the West, which accounted for 20 of the 25 markets with the largest increases, according to the report.
The top three markets were Burlington, Vermont, with a 284% increase; Prescott, Arizona (up 183%); and Bremerton, Washington (up 183%).
The report also noted that more home-flip purchases are being done with all cash. The percentage of flips that were financed dropped to 35.2%, down from 41% a couple of years ago.
Average gross profit on flipped homes was over $100K in some markets. Areas with the highest return per house were also among the most expensive, with San Jose ($242,625 gross profit), San Francisco ($163,000) and Washington, DC ($146,728) topping the list. Markets with the lowest returns were Kansas City ($26,963), San Antonio ($29,000) and Houston ($29,901).
Home-flipping data is a bit of a lagging indicator, however, as a significant portion of the properties were acquired in late 2021 and early 2022 — a time when the market was still really hot, said Maksim Stavinsky, co-founder and president of Roc360, a provider of lending and other services to investors.
"On the other hand, it is encouraging that investors were able to clear in excess of four hundred thousand properties in an environment of rising interest rates, without a meaningful increase in project timelines," Stavinsky said.
Cheryl Reid-Simons contributed to this story.