House Flipping: An Update

Investopedia defines "flipping" as "A type of real estate investment strategy in which an investor purchases properties with the goal of reselling them for a profit. Profit is generated either through the price appreciation that occurs as a result of a hot housing market and/or from renovations and capital improvements. Investors who employ these strategies face the risk of price depreciation in bad housing markets."

Beginning as a day-trading trend in the early 2000's, house flipping has seen continual increases in business throughout the country's real estate market. As a matter of fact, RealtyTrac recently reported house flipping saw a 3% increase in 2016, leading this trend to a ten-year high.

This boom has carried over to the Chicagoland metropolitan area. Chicago is one of many metropolitan areas with a population of 1 million plus people and a gross flipping return on investment of 75% or higher, closing out 2016 at 75.9%.

Meanwhile, Illinois as a whole has landed in the top five states with the highest gross flipping ROI as evidenced by the infographic below.

With 2016 being a record-high year in a decade for house-flipping, it's difficult to picture the trend slowing down any time soon. This could be especially true due to the next statistic.

Although house flipping is at a ten-year high, Crain's Chicago Business reported that Illinois' home inventory levels are at a ten-year low.

"In the week that ended Jan. 7, 7,028 homes were on the market in the city, according to a report posted by the Chicago Association of Realtors on Monday. That's the lowest recorded in CAR's data, which goes back to January 2007. It's 3.7 percent below the inventory on hand at the same time last year, when the 7,297 listed homes were the lowest recorded."

With a low inventory, it's easier for real estate investors to flip houses in a timely manner. This is because prospective home buyers have fewer options to consider in the market.

However, despite having the ability to make a quick profit on a home flip, be wary. Despite being able to potentially make a quick buck with a flip, there are a few disadvantages including issues with cash flow and tax management. Even worse, those attempting to get involved with house flipping may find that it's easier is theory than it is practice.

Investopedia actually prepared a list of some qualities exhibited by those who run into issues with a home flip, including the lack of:

• Money
• Time
• Skills
• Knowledge
• Patience

Each of these items in their own right, can prove to be detrimental, especially to first-time house flipper. But as long as you do your research and invest some time into your house flipping expeditions, these shouldn't be an issue.

For all of our real estate legal needs, contact Michna Law Group by email at BJM@MichnaLaw.com or by phone at 847.446.4600.