While flipping real estate is generally associated with mortgage fraud, a recent study indicates legal real estate flippers are among the top investors.
First American Real Estate Solutions announced Monday the results of its study on real estate “flipping,” or the reselling of residential properties for profit within 24 months of purchase, in three of the hottest real estate markets: Las Vegas, Miami and Orange County.
The Real Estate Flipping: Gold Mine, Mistake or Fraud study by First American’s director of research and analytics, Dr. Christopher Cagan, analyzed the markets’ flips from 1999 through June 2005.
The study reportedly showed that although home prices have dramatically increased in recent years with annual appreciation of 20 to 30 percent in some areas, flippers have obtained returns far in excess of those strong gains — in many cases above 100 percent per year.
“While the market has done well overall, flippers have done even better,” said Cagan in the announcement. “During the past six years, flippers have exercised a level of strategic intelligence and savvy in their investments that proved to be even more profitable than the strong gains experienced by the general market.
“Among the strategies employed by purchasers who flipped properties within two years were investing in the hottest local markets; purchasing distressed, under-valued or foreclosed properties; and taking advantage of the psychology associated with a market experiencing higher than historical rates of appreciation to earn spectacular returns on their investments,” Cagan added.
Each of the three markets had an “ordinary” percentage level of flip sales made over the past 6.5 years; about 20 percent in Orange County and 25 percent in both Miami-Dade County, Fla. and Clark County, Nev., according to the study.
The study reveals that the profitable “sweet spot” of the elapsed time between purchase and flip sale is three to six months, as it represents flipping of the purest type, in which a property is put back on the block almost immediately after the original purchase, perhaps with minor repairs or painting. This type of flipping intensified in the Vegas- and Miami-area markets in 2004 and 2005, while Orange County was the least prone to this type of flipping, yet had its strongest year in 2004 as prices rose more then than this year.
The percentage of flips was even more dramatic in the span of six months from purchase to 12 months in 2004 and 2005 for the Vegas market — where they nearly doubled from about 7% to 13% in the past year and a half, and the Miami area, growing from about 8% to 11%.
While the percentage of flips occurring at 1 year from ownership to two years also increased in the past year and a half, the rises were more notable in shorter-term flips.
The study showed that while flip sales do not dominate real estate markets at the county levels, they can dominate the market in local areas. While no areas within Orange County exceeded 40 percent of all sales for 2004 and 2005, Miami had five areas exceeding that level with the highest being 46.9% and Vegas had two with the highest being 52.3%.
Other key findings include disclosure of gross and adjusted rates of return for different types of flip re-sales and identification of specific zip codes where flipping was the most frequent and where the highest returns were obtained.
