As the UK property market continues to rally, thousands of investors have used “house flipping” to capitalise on the rising house prices. It’s an age-old property investment method, but there are downfalls as well as profits to be made.
New figures from Hamptons estate agents reveal that around 19,000 properties were “flipped” since the start of the pandemic. This is the process whereby an investor purchases a home at a competitive price, then either refurbishes it and puts it back on the market, or holds onto it for a short time and resells at a higher price but in the same condition.
The Hamptons research looks at those who bought and sold a property within the same calendar year. On average, investors reaped profits of an impressive £48,190, says Hamptons. And around 75% of “flippers” sold the property for more than they bought it for.
Judging the market
According to the most recent figures from Halifax, house prices rose by +7.4% over the year to August 2021. This follows a huge annual house price rise of 13.1% in the year to June 2021, and 8% in the 12 months to July. That means that for many people who bought property in mid-2020, the value is likely to have risen a fair amount.
In terms of house flipping profits, much of that depends on the specific location, as well as property type. For example, Zoopla data shows areas like Liverpool, Manchester and Sheffield have seen the biggest price hikes.
The stamp duty holiday also influenced the market, and has certainly driven buying activity in recent months. It meant buyers could save up to £15,000 on a purchase, which would have had a big impact on the final profit for flippers. It made the past year a particularly lucrative time to buy and make a quick sale.
Is house flipping a good idea?
Property flipping turns the idea of property investment as a long-term strategy on its head. Generally, the longer an investor or homeowner holds onto a property, the more money they will make when they sell thanks to capital appreciation. But with flipping, it is about buying a property at a good price in a rising market or up-and-coming location, and selling when the market is still hot.
Some flippers prefer to buy homes that need complete renovation. Provided the cost of the refit doesn’t outweigh the sale price, many investors make money this way. However, there are some pitfalls with this method. Sometimes, building costs, including labour and supplies, can be higher than expected. Furthermore, if the property is in an undesirable area, sometimes even a full refurbishment won’t attract buyers. This can mean it ends up being sold for less than anticipated.
Another method some buyers take is to buy property off-plan. This is where investors pay a deposit and secure the property, and by the time the development has been completed, the new home is often worth significantly more than it was originally. Early bird discounts are also sometimes available, further increasing the profit at the end of development.
The investor could then resell the property before the build is actually complete. As stamp duty is only payable on completion, this could save the original buyer that extra cost.
But there is no guarantee that a buyer will be found, and the investor must then be prepared to turn their short-term flipping plan into a long-term investment. The investor will need to go through with the purchase, and make sure they have the cash to pay for the stamp duty.
Jeremy McGivern, managing director of Mercury Homesearch, said: “The big danger is that too many speculators target the same high-density developments and then try to flip at the same time, and the demand dries up. Then those who can’t complete will lose their deposit.”
Another barrier to this strategy is that some developers have banned house flipping, and some mortgage lenders are also reluctant to lend in this market.
Property is traditionally viewed as a long-term investment, rather than a “get rich quick” scheme, and experts would argue that the stamp duty costs paid on completion are offset in the long run by the potential rental yield and capital gains achieved through holding onto the property for longer.