First, the number of overturned houses is decreasing. Recent figures reflecting flip activity in the first quarter of 2021 show total flip volume is the lowest since 2000. Currently, only 1 in 37 real estate deals is a flip, down nearly 5% since Q4 2020. The year-on-year increase was 7.5%.
Fliphouse is heavily dependent on macroeconomic conditions, so it’s no surprise that activity is declining. Rising inflation concerns, uncertain interest rates and rising pending foreclosures make it difficult to predict what the housing market will look like in the months ahead.
But even for Flipper, who continues to operate, performance has taken a hit.
Gross profit fell to $63,500 from $71,000 in Q4 2020, down nearly 11%. Profit margin also fell to 37.8% from 41.8% in the previous quarter.
Why are profit margins declining?
The decline in margins can be attributed to three factors:
- Nearly universal property price increases across all regions and property types are making it increasingly difficult for flippers to buy property cheaply.
- Inventory is so low that competition for “fixer uppers” from regular homebuyers is heating up. More traditional homebuyers seem willing to take the risk and effort of renovating a property if they can actually get something done.
- Rising material and labor costs will squeeze profit margins.
That said, the finished Flip is likely to go public in a very favorable environment and fetch a premium price.
With inventories starting to recover and lumber prices down more than 40% from their May peak, it will be interesting to see if reversal activity and profits pick up in the second quarter.
Note by BiggerPockets: These are opinions written by the authors and do not necessarily represent the opinions of BiggerPockets.