An increasing number of investors are looking to purchase homes and renovate them fast for profit, thanks to the rapidly rising housing market prices. While home flips are on the rise and investors expect to see growing returns, profits are declining.

Nearly 95,000 houses were flipped in the third quarter this year. This was an increase from the previous quarter, when flipping plummeted in the wake of the pandemic. According to the ATTOM property database, flips accounted for 5.7% of all sales.

The average gross profit per flip fell to just below $69,000 in quarter three, a decrease of 1.6% from last year. It was also the lowest rate of return since 2011, at 32%. The return on investment fell to 32%, compared with a near 44% return during the same time last year. This is also the lowest annual decline since 2009, the crisis in the housing market.

The term “flip” refers to a property that has been bought and sold during the 12-month-long period. Because home price rises have begun to slow, investors are receiving smaller returns. Prices rose much faster when investors bought the properties. There was a slower rise in resale values than in purchase prices. This led to fewer profit margins.

Todd Teta (ATTOM’s chief product officer) stated that it was evident that falling fortunes didn’t deter investors in a scenario that averages 32% profit before expenses and deals that typically take five months. We will be able to see in the next months if the quick turnarounds they are able to make will suffice for them to continue to lure them into home-flipping or push them away.

Investments made in Oklahoma City, Pittsburgh, and Buffalo, New York saw the highest returns. Laredo in Texas, Boise Idaho, and Portland Oregon had the lowest returns.

Daniel DiGiacomo is a Baltimore-area resident who has been doing home flipping for more than a decade. According to him, this year has been particularly difficult. The supply chain problems were only the tip of an iceberg.

DiGiacomo stated that the cost of holding onto the property for longer, as well as the cost of labor and materials, is more than what was expected. He also said that costs have increased by about 30% compared to the period before the pandemic.

This is why he now sells to investors rather than owner-occupants. Renting properties to investors is a good option, as they don’t have to be finished with high quality finishes. This saves DiGiacomo money and increases his profit.

It was much easier to make a product that is rental-grade with local materials than to put a more expensive product on the marketplace,” he said.

The higher cost of flipping properties and difficulty finding properties that are worth the effort, as well as supply chain challenges, resulted in him selling half his properties.

If interest rates start to rise next year as is expected, then flippers might pull back. Additionally, flippers have less inventory and there does not seem any easing.

Redfin reported that November’s active listings dropped 18% from last year. It will make flipping even harder and more profitable if the inventory in pre-spring is as tight.