2020 has brought massive changes to almost every area of our lives, and the real estate market is no exception. If you've been thinking about taking on a fix-and-flip investment strategy, it's important to look at the current state of the market before getting started. We've brought you three things house flippers need to know in 2021 before taking on the first flip of the year.
House-flipping profits are at a 20-year high
If you've been wondering whether the time is right for a fix-and-flip investment strategy, the data suggests it may be the best time in a while. According to ATTOM Data Solutions, house-flipping profits have soared to their highest level in 20 years. In the third quarter of 2020, the average gross profit on a flip was $73,766, up from $61,800 in the third quarter of 2019..
That said, there is one big caveat to those figures: The profit margins listed do not account for the cost of any renovations or other expenses required to put the home on the market. Rather, this data simply focuses on the difference between an investor's purchase price and the eventual sale price for the property. With that in mind, budgeting is extremely important here.
You may have to offer more than you'd expect
When budgeting, one of the first things to consider is the home's purchase price. Traditionally, investors will try to increase their profit margins by making an offer well below the list price. However, this common maneuver may not be possible in this market. Not only are we in a seller's market, but we're also experiencing a nationwide inventory shortage.
According to the most recent data from the National Association of Realtors (NAR), in December 2020, inventory levels were down a record-setting 23% since the same time in 2019. In addition, the months' supply of housing metric also reached a record low of just 1.9 months.
When inventory is low, home prices tend to increase rapidly because there's so much competition for every available listing. So you may ultimately find yourself having to offer more than you normally would for a property in order to remain competitive in the current market.
But your sale price will likely be higher too
That said, it's not all bad news for investors. Other metrics suggest that, once you do manage to secure a property and get it ready for sale, you'll likely be able to sell it fast and for a profit. For example, NAR's single-family home price data found the national median home price rose to $315,900 in the fourth quarter of 2020, up 14.9% from the same time in 2019.
By the same token, median days on market, a measure of the amount of time it takes for a home to go under contract once listed, has been down recently. This suggests that inventory is moving faster once it hits the market. According to NAR's most recent Weekly Housing Market Monitor, properties are selling in just 27 days, a decline from 47 days in February 2019.
The bottom line
Flipping homes isn't an exact science. However, it is rooted in math. Before you make any major moves, have a budget in mind, and get a firm idea of the state of the local real estate market. If you need assistance, you can always ask a local real estate agent or appraiser for help pulling up local market statistics, gathering comparables, and determining after-renovation values.