BUILDERS IN THE COUNTRY'S HOTTEST markets are eyeing the practice of “flipping”—reselling residential properties for profit within two years of purchase—with both enthusiasm and wariness. But whether they like it or not, as a study by First American Real Estate Solutions concluded, flippers are here to stay—at least until the housing market cools.
The study, which covered sales of existing properties in the Las Vegas, Nev., Miami, Fla., and Orange County, Calif., markets, found that flippers accounted for roughly 20 percent to 25 percent of sales in those areas from 1999 through June 2005. However, in 2004 and 2005 the number of flips spiked, with figures for Miami and Las Vegas areas reaching more than 40 percent.
The study's author, Dr. Christopher Cagan, First American's director of research and analytics, says that flippers are much more savvy investors than anticipated. For example, most flippers who sold after three to six months of ownership realized well over 15 percent profit, which is considered the break-even point. However, when the gains were converted to an annualized basis, the appreciation rates often exceeded 50 percent or 100 percent.
With speculation paying off in a big way, builders worry that the flipping will artificially inflate home prices in the near term, leading to devaluation down the line. However, Cagan allays some of these fears.
“I don't think flippers make the market get out of hand … [but] there may be some local exceptions,” Cagan says. “The most important thing that has made prices rise is low interest rates and generous lending practices.”