House Flipping Profits Down in Q3 2022

As 2022 comes to an end, real estate investors are faced with yet another challenge as house flipping profits go down in the third quarter.

A lot of real estate investors have already been greatly impacted by the present high-interest rates and a cooling US housing market. 2023 will prove to be a challenging year for investors, especially those who are into the fix-and-flip business. 

Diana OIick reports on CNBC that the Q3 gross profit on house flipping went down to an average of only $62,000 per transaction. The gross profit is the difference between the median property purchase price and the median resale price on the market. 

This decrease registered an 18.4% drop from the previous quarter and an 11.4% year-over-year decline. These numbers were taken from real estate data provider ATTOM. These numbers represent the smallest house flipping profit since 2019 and the fastest drop in a quarter since 2009. 

According to ATTOM, the return on investment on house flipping went down from 30% in the previous quarter to 25%. While it did go down a bit, it’s still not as good as investors were hoping for. ATTOM said that it’s not about the amount of money but rather the speed at which profits are going down. 

Flips made up roughly about 7.5% (or 92,422 single-family homes and condos) of Q3 2022 overall home sales. That’s roughly 1 in 13 transactions. And while the market, indeed, is cooling down, property prices are still high on investment properties.

Related: Will There Be a Real Estate Housing Market Correction in 2023?

3 Challenges House Flipping Investors Are Facing

Investing in the real estate housing market is a great way of building wealth and equity, but it is not without its challenges. These challenges may be common in all markets and unique in some, but their effects depend largely on the type of investment strategy you get yourself into. 

Going into 2023, given the current housing market conditions, house flippers are faced with certain challenges that impact their line of business in a unique way. House flipping profits are affected by the following: 

Shifting Market Conditions

The US real estate market has always been a constantly changing market but has remained a much more reliable investment vehicle compared to other types of assets. 

ATTOM’s executive vice president of market intelligence, Rick Sharga, expressed that even house flippers aren’t invulnerable to the market’s changes and shifting behavior. 

He goes on to say, “With demand from buyers weakening, prices trending down over the past few months, and financing rates significantly higher than they were at the beginning of the year, flippers face a much more difficult environment today and probably will in 2023, as well.”

High Property Prices and Mortgage Rates

The changes in market conditions are affected by several factors, which include inflation, the law of supply and demand, and buyer behavior. But two other notable factors impact the changes in every housing market: property prices and mortgage rates. 

Let’s talk about mortgage rates first.

As the Federal Reserve does its best to battle inflation, the ones taking the brunt of all this are consumers and borrowers. And we all know how expensive it is to purchase an investment property. Not everyone who goes into real estate investing has enough money for an all-cash transaction. This is why a huge chunk of investors turn to financial institutions and lenders. 

We took a look at Bankrate to see what the existing mortgage rates are at the time of writing this. The rate for a 30-year fixed-rate loan is 6.47%, while a 30-year refinance rate is 6.54%. Although they have gone down a bit from the previous week, they’re still hovering near the 6.50%-mark. 

Unless you’re using the BRRRR strategy, taking out a mortgage on a potential fix-and-flip investment property won’t do you any good. This is why most house flippers make all-cash purchases. Which leads us to property prices. 

While the housing market has shown signs of slowing down, this doesn’t necessarily mean that property prices have gone down, too. This just means that the rate of appreciation is going at a much slower rate compared to the previous month’s. 

House flipping investors are still faced with high property prices, especially in areas that have a higher housing demand. 

Related: How to Get the Best Mortgage Rate for Investment Property in 2023

Costs of House Flipping

An investor’s financial obligations on a fix-and-flip property don’t end with its purchase. Going into house flipping will cost you a pretty penny, especially if you want to make some good profit from it. 

Aside from the property purchase cost, the closing costs, inspection fees, and other expenses associated with buying a property, you will also need to take care of several other costs that go with rehabilitating and reselling a home. These are just some of the things you will need to set aside some money for: