Loss-making property flipping on the rise

Original article published by Mortgage Business

A new report from CoreLogic has warned of the financial risks of “flipping” property after it found a “clear increase” in loss-making sales.

According to the December Property Flipping Report by CoreLogic, “flipping” is a term used to describe short-term property trading, where a buyer purchases a home with the intent of reselling the property in a short time frame (generally one or two years) for a profit.

“Although the proportion of flips at a loss has declined from recent highs in 2009 and again in 2012, there has been a clear increase in loss-making flips recently,” the report said.

“The rising number of loss-making flips highlights [that] there is some financial risk in flipping, keeping in mind that the proportion of loss-making flips on a net basis is likely to be substantially higher once expenses are taken into account.”

 The good times of property flipping in Sydney may come to an end in 2018. Whilst 2017 saw 90% of flipped properties turn a profit, there has been an increase in loss-making flips recently.

The good times of property flipping in Sydney may come to an end in 2018. Whilst 2017 saw 90% of flipped properties turn a profit, there has been an increase in loss-making flips recently.

CoreLogic found that over the 12 months to June 2017, 10.9 per cent of flips held for less than 12 months were at a loss, and 10.1 per cent of flips held for between 12 and 24 months resold for a loss.

Interestingly, the report found that the introduction of the capital gains tax discount for investors that held properties for more than 12 months in 1999 made little difference to flipping behaviour.

CoreLogic warned that while there are many examples of profitable flipping, it’s important that anyone considering this strategy understands the costs involved.

“Transacting real estate is an expensive exercise. Successfully flipping a home involves more than simply selling the property for more than it was purchased for.

“In order to make a profit, flippers will need to recoup their transactional costs, such as stamp duty and conveyancing, as their selling costs such as marketing and real estate agent commission. There is likely to also be interest payments on the home loan.”

Key regional variations

NSW

  • Over nine in 10 flips in Sydney and regional New South Wales were profitable in 2017, reflecting the recent high growth in property values. In Sydney, only 5.7 per cent of flips within one to two years of purchase were at a loss. This compares to 37.6 per cent a decade ago.
  • The Illawarra region experienced the highest level of flips in NSW (8.7 per cent of resales) within one to two years, and the highest annual increase in flipping (up 1.7 per cent on 2016).  Illawarra was also one of the most profitable regions in NSW, with only around two per cent of properties flipped at a loss.

Sydney and Melbourne were the most profitable capitals for flipping, while Darwin was the least profitable one.

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