As house flipping picks up steam throughout the nation, the Chicago area is in the top 20 percent of 126 U.S. metro areas for making money on fixer-uppers, according to a RealtyTrac analysis released Wednesday.
On average, flippers earned a return of 74.2 percent on the homes they bought and sold quickly in the Chicago area during the first quarter of this year. That compares with a national average of 47.8 percent measured by RealtyTrac.
Flippers look for cheap homes they can fix up and then sell for a large profit. Activity nationwide has increased 20 percent since the previous quarter. But it still lags by far the frenzy that preceded the housing bust, said Daren Blomquist, senior vice president of RealtyTrac.
About 6.6 percent of homes sold in the nation during the first quarter of this year were sold to flippers. That’s 26 percent less than the flipping peak in the first quarter of 2006.
Yet, with a dearth of housing inventory, purchases by flippers are raising prices in popular markets. While those purchases can give an early lift to markets that have been depressed, when flipping becomes excessive there is a risk that it will “contribute to a home price pressure cooker that overheats a housing market,” Blomquist said.
That risk is not as evident in the Chicago area as in many of the areas studied by RealtyTrac. Home prices have appreciated slowly in Chicago compared with other parts of the country, and that has left discounts on homes that appeal to flippers. In the Chicago area, the average discount enjoyed by flippers had been 36 percent below the estimated market value of the home. Nationally, the average discount has been 27 percent, according to RealtyTrac.
Buying a house at a deep discount “is a big part of the success in flipping,” Blomquist said.
In the first quarter of this year, the average price of a home purchased for flipping in the Chicago area was $99,000. After fixing the property up, the average sale price was $172,500. So, on the basis of the original purchase, the seller had a gross profit of $73,500. Yet upgrading the property before a sale typically costs about a third of the purchase price, noted Blomquist. So money pocketed was significantly less than the $73,500 profit.
Much of the opportunity in the Chicago area is being driven by Cook County, where the majority of flipping is taking place and where flippers benefited from a 97.7 percent return on their investment, not counting the cost of rehab, noted Blomquist. In Cook County, the average purchase price of a home that was flipped in the first quarter of this year was $88,500. It then sold for $175,000 on average.
In a possible sign that opportunity is starting to diminish a little, the return for properties flipped declined 2 percent from a year ago. After buying a home to fix up, it also took flippers 187 days on average to sell the home. That compares with 179 days nationally.
Yet, “Cook County is a very good opportunity for flippers,” Blomquist said. He contrasted it with Lake County, where flipping has declined in proportion to total homes sold — a sign that opportunity there is dwindling. Flippers in Lake County originally paid an average of $122,000 on homes and sold them for an average of $175,000. That left only a 43.4 percent gross profit, not including rehab costs.
The return for flippers in Lake County is among the lowest in the state. Still, the profit was not far below the national average of 47.8 percent.
“The goal for flippers is to buy as close to the bottom as possible,” Blomquist said. “But it is still a very risky business.”
Flippers can make mistakes if they underestimate the cost of refurbishing the property, misjudge the market for the quality of home in a particular area, or overpay compared with the costs they will incur and the price they can capture on a sale, said real estate agent Mabel Guzman of @properties.
Success, she said, “is in the math and knowing the market block-by-block.”
If the cost of purchasing a home is too high compared with the likely sale price, potential flippers “need to walk away from deals,” she said. Those who hunt carefully for a home to flip “can always find one that will work,” she said.
In the Chicago area, little opportunity remains in prime locations such as Lincoln Park or Lakeview, but there has been opportunity in the South and West sides in neighborhoods such as Beverly, Chatham and Auburn Gresham. Some flippers recently have been looking in the suburbs for more opportunity than in the city, Guzman said.
According to RealtyTrac, in the first quarter of this year, 719 homes were flipped — resold within a year of their original purchase — in Cook County, followed by 159 in Will County, 111 in DuPage County, 84 in Kane County and 81 in Lake County.
The average price of a home sold by a flipper in DuPage was $240,000, providing a 66.7 percent profit over the flipper’s original purchase price. Kane provided a 60.5 percent profit on the average home sold at $154,500, and Will flippers encountered a 61.4 percent profit on homes sold on average for $171,000.