It shouldn’t be surprising to find that flipping houses is largely about location, location, location - like everything else in real estate. Your market is a huge determinate in how much money you make on a deal from the start to the finish.
But how do you know if a market is prime for flippers? Is your current market good for house flipping? Keep reading to get a better feel for what makes a market ideal for flipping houses.
Are There Opportunities to Purchase Distressed Homes?
The gross return for flipping is a little bit slimmer than it used to be (44.3% in Q2 2018 compared to 50% in Q2 2017), largely because there are fewer foreclosed and bank owned homes up for grabs. That means there are fewer super amazing deals for house flippers to capitalize on.
Although the overall numbers are down, some markets still have a good supply and the majority of flips start as distressed homes. In Q2 2018 the markets with the most distressed home flips included:
- Atlantic City, NJ (71.0%)
- El Paso, TX (70.5%)
- Trenton, NJ (65.2%)
- Virginia Beach, VA (60.7%)
- New York, NY (56.5%)
The areas with the most foreclosure starts this past summer where there may be more current opportunities for distressed home flips include:
- Houston, TX
- San Diego, CA
- Los Angeles, CA
- Miami, FL
- Indianapolis, IN
- Minneapolis, MN
- Jacksonville, FL
- Detroit, MI
- Cape Coral-Fort Myers, FL
- Austin, TX
If you don’t work in these markets that doesn’t mean flipping is out of the question. It just means there’s more competition to get distressed homes that are sold under value.
Is it a Buyer’s Market, Seller’s Market or Balanced?
An area can either be a seller’s market, buyer’s market, or balanced. Each has specific characteristics:
Seller’s Market - A seller’s market occurs when inventory (homes for sale) is low and doesn’t keep pace with demand. In these circumstances, homes typically sell quicker and there’s a better potential for multiple offers.
Buyer’s Market - When the supply of homes outpaces the demand and inventory rises it’s considered a buyer’s market. Buyers have a large selection of homes to choose from and are in a better position to offer below asking price.
Balanced Market - In a balanced market, there are around 6-6.5 months of inventory with supply meeting demand. This is considered the ideal for a market at large, but it’s not necessarily the norm.
It’s harder for any seller, including flippers, to get the best purchase price possible in a buyer’s market. A seller’s market is the best scenario, but flippers that price their home right can still do well in a balanced market.
Are Labor Costs Reasonable?
Construction labor costs have been creeping up due to a shortage in workers, but some markets are more impacted by it than others. And some markets just have lower labor costs in general.
Since the vast majority of flips involve a significant amount of renovation and building, how expensive it is to hire contractors is a big factor for the bottom line. The cheaper it is to hire a quality construction crew the less the renovations will cost and the higher the profit margin will be.
Is the Area Growing?
Even if there are a lot of distressed sales in an area, it doesn’t do a flipper much good if no one wants to live there. It’s a simple case of supply and demand (see above). Ideally, you’ll want to be in a hot market that’s growing.
Growth, particularly population and job growth, means demand. Demand means buyers.
Austin, TX is a perfect example of this. The city has had explosive population growth in the last 18 years. In 2017 the Census noted that the Austin metro population was 2,115,827. That’s 2.7% higher than the year before. From 2010 to 2016 there was a 19.8% population growth . People are attracted to the area because of the strong job market and growing wages. As a result, monthly housing inventory is extremely low and home prices have steadily appreciated.
Markets with this kind of constant growth are great for house flippers because of demand and appreciation but keep in mind acquisition costs tend to be higher too.
Is There a Lot of New Building Going on in the Market?
One thing that can undercut a house flipper’s efforts is developers that are building new homes in the same area. The majority of home buyers want move-in ready homes , which is why flippers put so much time and money into renovating their properties. But there’s nothing more move-in ready than a new home. Lots of building activity also means the supply of homes is going to go up.
There are two things that could give flippers an edge in a market where builders are throwing up new homes. If a flipper’s home isn’t in an HOA that’s a benefit to some buyers. New homes also tend to cost more than comparable resales , however, developers are beginning to build smaller homes at a lower price point. Flippers will need to price their homes right and polish up the property really well to compete with new builds in nearby neighborhoods.
When the factors above are combined it makes for a very strong market for house flippers. Most markets won’t check all the boxes, but as long as some of the bases are covered you have an opportunity to make a healthy profit with a house flip.