Do Investors Flip Over Housing?

Abstract

The current study explores the investment performance of short-term investors known as flippers in the residential real estate market as well as the impact that flippers have on the housing market. The study finds that investors who buy and then subsequently resell properties within a short period of time tend to generate returns in excess of the market by purchasing properties at a discount from distressed sellers. Flippers purchase properties discounted an average of 7% in the market. This discount reflects the ability of flippers to identify underpriced properties which supports the information advantage story. When using all-cash purchases, the price is further discounted 12% and properties purchased at foreclosure are discounted an additional 20% for a total discount of 39%. These investors use debt financing to further magnify the return on their properties. Flippers also have the ability to sell properties at a 5% premium even after controlling for equity, search costs, and home improvements. However, the realized excess price appreciation is inversely related to an investor’s time horizon with higher (lower) returns associated with shorter (longer) holding periods. As more flippers enter the housing market, the study finds that a higher number of foreclosures occur in neighborhoods that have a higher frequency of flipping activity. Further, following the collapse of the housing market, flippers purchased properties at foreclosure and flipped them at a significant profit. In summary, flippers manage to earn positive excess returns both in hot and cold housing markets.