House flippers of luxury properties priced at $1 million or more are turning smaller profits on their real-estate investments compared with a year ago, according to a second-quarter report released Thursday by RealtyTrac.
“Flipping returns are softening in some of the higher-priced markets such as San Francisco, Seattle, Denver and Los Angeles,” said Daren Blomquist, vice president at RealtyTrac, a data company based in Irvine, Calif. “The fewer foreclosure deals and longer flipping timelines that we see in the data demonstrate that flippers are getting squeezed on both sides of the profit equation.”
Competition from foreign buyers in some of the pricey U.S. markets is also forcing home flippers out of the market, RealtyTrac said.
RealtyTrac defines a “flipped house” as a property that is resold less than a year after it was bought. The average time to flip a home in the second quarter was 179 days.
Overall, for luxury and non-luxury properties, flipped homes accounted for 4.5% of sales in the second quarter, with the average gross return on investment at 35.9%. RealtyTrac says the return figure is “the average gross profit as a percentage of the average original purchase price.” RealtyTrac does not include rehab costs or other expenses in calculating the profit.
A year ago, flippers in San Francisco were making a tidy 38% return; that figure was 16% in the second quarter of this year. Los Angeles was less dramatic, with returns dipping from 37% in the second quarter of 2014 to 35% at the same point this year.
California accounts for the bulk of high-end flips in the U.S: 74% of all flips that sold for more than $2 million in the second quarter were in the Golden State. San Jose, Calif., had the Zip Code with the highest average flip price, $1.9 million.
Competition on the front-end to purchase properties at a discount in high-price cities is becoming more intense, diminishing returns on flipping homes in markets such as San Francisco or Santa Barbara, Calif., experts say.
“When we look at California, a million-dollar home isn’t really luxury anymore. [Flipped] homes in the $500,000 to $2 million range… aren’t doing as well on return,” Blomquist said.
Compared with lower price tiers, real estate investors across the U.S. often got higher returns on flipped properties priced above $2 million. These home flips had an average 43% return.
One particularly profitable renovated flip, according to RealtyTrac, was a refinished home in Kahului-Wailuku, Hawaii, which was bought for $1.5 million and resold for $6.7 million.
Of the 30,000 homes flipped in the U.S. in the second quarter, just 615 sold for $1 million or more.
“It’s a very small space, but the reward can be very high with these high-end flips, ” Blomquist said.