When it comes to real estate, the only sure thing is that there are no sure things. And while the housing market might have heated up over the past few years, those who flip houses have had to play it more conservatively, even with housing inventory low and demand still high.
“While Pittsburgh is probably still in the top 10 in terms of flipping houses, everything has slowed down nationwide, mainly due to the cost of borrowing money for investors,” explained Kirk Klett, co-owner of 412 Properties, which represents both buyers and sellers and has construction and property management capabilities in-house. “The buyer pool is also smaller now because of the higher interest rates, which is limiting what people can afford.
“People are scaling down, so we’re being more conservative with the flips that we do,” he added.
Though inventory is still pretty low, it has become more difficult for investors to find deals that work for them, according to Klett.
“In order to have an affordable house that will sell quickly on the back end, you have to find something you can afford on the front end,” he explained. “You have to factor in construction costs and construction interest, and if those costs are too high, it makes it difficult for the end buyer.”
Pennsylvania Still Tops the List
According to The Motley Fool, Pennsylvania still showed the most significant gross return on investment (ROI) for house flippers in 2022, with the average ‘fix-and-flip’ investor receiving 78.9 percent ROI—or approximately $97,000—down from a 92.6 percent ROI in 2020. The hottest areas include Scranton-Wilkes-Barre-Hazleton at number one; Reading, PA at number three and Pittsburgh at number four.
“The Northside, Highland Park and Lawrenceville are still okay if you can find a good deal,” said Klett, adding that North Allegheny, Mt. Lebanon, and some of the suburbs within a few miles of the city are also still attractive to flippers. “Homes in good school districts are very popular now, but flipping really is based on a case-by-case basis.”
Flippers who succeed in selling the homes they buy have had to make some adjustments as a result of COVID and supply chain issues. In Klett’s case, this meant focusing on products that were readily available locally in order to prevent construction delays.
“The bigger issues are the price increases in materials, labor costs and the labor shortage, which had become pretty bad,” he said. “It improved in the last three to six months, probably because not as many people are buying and flipping homes.”
While 412 Properties has flipped about 20 houses in the past few years, they are currently renovating their flips to make them long-term rentals instead of selling the finished homes. “This year, we’re looking at doing about 20 projects, but the vast majority are being renovated for long-term rentals for investors who are looking for long-term stability instead of cashing in on a few quick deals,” said Klett.
Pros and Cons of Flipping
While home improvement shows make it look easy to flip a house, you’ve got to have a lot of knowledge to succeed—and sometimes nerves of steel.
“Sometimes you can pre-sell a house and close as soon as construction is complete, and other times, it may sit for three or six months, which affects your profitability,” said Klett. “In a volatile market like we’ve had, sometimes you don’t make anything, and sometimes you do very well.
“The vast majority of house flippers are now companies; a lot of individuals have tried it once or twice, but it’s a lot of work,” he laughed. “It’s a lot harder than they make it look on TV. Unless it’s your full-time business, it’s difficult to do it well consistently.”
Still, people are willing to take the risk; in 2017, 5.7 percent of all home sales nationwide were flips; by the first quarter of 2022, that share increased to 9.6 percent. In the first quarter of 2022, 114,706 homes were flipped nationally, up nearly 7 percent from the previous quarter.
Selling a home to a house flipper can be beneficial to homeowners, who can sell it quickly, often in a cash deal, with no inspections required. “They don’t need to make any repairs and in our case, they are dealing with a seasoned buyer who knows how to get things done quickly,” said Klett.
Buyers benefit because in many flips, homes are taken down to the studs, and filled with brand new products and systems including plumbing, electric, HVAC and more. “They know they are getting a turnkey product that won’t require much maintenance going forward,” said Klett.
Today’s homebuyer is typically looking for a three-bedroom house, or a two-bedroom that offers flex space for those who are working remotely from home, said Klett, noting that the average sales price for a flipped home in Pittsburgh is about $400,000. “We’re seeing a lot of interest in homes with fenced-in yards as well because a lot of buyers have dogs, and they also want the house totally updated, though it’s rare that they require any specific finishes,” he said.
Flippers look for houses everywhere and buy from the MLS (multi-listing service) as well as wholesalers who have already negotiated prices with sellers. “We also talk to neighbors, friends and families to find out who wants to buy or sell a house,” said Klett. “We connect with potential clients organically. We are not one of those companies who mass text and spam call every homeowner.”
While the market may have been volatile, Klett still believes that Pittsburgh house flippers have a bright future.
“I think it’s going to remain a strong market compared to larger cities of similar size. Pittsburgh is very affordable, and we also attract a lot of young professionals coming out of bigger cities like New York, Chicago and DC, where $400,000 for a house is very affordable,” he said. “There’s a lot of upside for individuals looking to flip; I believe the next 10 years will be similar to the last five years in that it will remain a strong market.”