On the Money

House flipping is back, with all its opportunities and risks

Flipping is back
Flipping is back

Flipping is back.

The trend of buying a fixer-upper, making some repairs and "flipping" to a new buyer quickly is making a return to real estate markets, years after the trend fell out of fashion with home buyers.

More than 6 percent of home sales last year were "flips", according to a new report from Trulia. The real estate data website defines a flip as the selling of a home at least twice within a year.

That's the highest number in a decade, before the real estate bubble burst and the financial crisis of 2008. So could the housing market flip out again?

"When you see flipping reach ten-year highs, economists like us start to worry a little bit." Trulia's Chief Economist Ralph McLaughlin told CNBC's "On the Money" recently.

"We think it's a little bit different this time ," McLaughlin added, "because we think more flips are actually value-added improvements that investors are making to the house, rather than speculative flips which is basically someone buying and sitting on a home waiting for the prices to rise."

But like the mid 2000's, home prices are rising. "Price increases in 2016 were the quickest in about 3 to 4 years," McLaughlin said, adding that gives flippers a potential layer of protection.

"If the flip doesn't go according to plan, they at least made a little bit up in price gains in equity in the house." McLaughlin added.

'Risky business'

A 'bank-owned' sign sits outside a foreclosed home in the Mountain's Edge neighborhood of Las Vegas, Nevada, in 2010.
Getty Images

Trulia found Las Vegas had the most flipping activity, increasing to 10.5 percent of all home sales, up from 9.6 percent in 2015. However, Trulia also found investors are making improvement to the homes, McLaughlin said. "We looked at the share of flips that actually had work done to them using building permit records and that is also near an all-time high."

Trulia, citing data from BuildZoom, showed 11.6 percent of flipped homes had acquired work permits. McLaughlin told CNBC that Las Vegas only requires permits for "big ticket items" like putting in a pool, or adding a bathroom.

Other flipping hot spots include three Florida cities, three Tennessee cities, plus Atlanta, GA. On the west coast, Fresno, CA and Tacoma, WA also made the top 10.

McLaughlin tells CNBC most of the flipping activity is among luxury properties, or "upper tier, this premium tier as we call it."

While he said "there [are] opportunities across all spectrums, because the inventory of starter and trade-up homes has dropped the most, we don't think there's a lot of activity going on there."

"Flipping is a risky business," McLaughlin warned. "If you buy a home that needs a lot of work or you didn't do due diligence you should have and there's some big ticket items you didn't anticipate maybe like a foundation that needs repair or new plumbing or new roofing , those things can take a lot of the profit margins off of that flip."

There's also the logistical risk and challenges that come with a flip. McLaughlin said you have to time all your projects to occur in the most efficient sequence.

"If your drywall person is tripping over your floor person, which is preventing the plumbing person from coming in, that can add a lot of delays and costs to you," the economist said.

"You really have to be like an orchestra conductor, you have to bring all the instruments together at one time," he added.

On the Money airs on CNBC Saturday at 5:30 am ET, or check listings for air times in local markets.