House flipping – an unexplored phenomenon on the real estate market

‘I will buy a flat. For cash’ – I often find this type of leaflets in my letterbox in a block in Warsaw’s Wola. Sometimes there are even a few such announcements per week. All of them read and look similar. Usually they are handwritten and photocopied, signed only by a first name and a contact phone number of an author, who often is interested in a flat for renovation and always adds the ’I will buy for cash’ slogan. What is the point of these announcements?  As it turns out, this is one of the ways how housing “flippers” work.

HOUSE FLIPPING – WHAT IS IT?

According to the definition in BusinessDictionary, Flipping Houses is a quick-profit strategy, in which an investor purchases real estate at a discount price and improves the property in order to sell it at a higher price. This can be a very lucrative profit strategy if the housing market is doing well. Old homes and foreclosures are popular properties used in house flipping because the investors can acquire these properties fairly cheap thus increasing the potential profit. Sometimes additional contractors are hired to upgrade the property’s condition, but an experienced house flipper may do the work all by his or herself.

WHERE IT CAME FROM?

Due to increasing inflation in recent years, the money we have saved is losing value every day.  That is a reason why many people are wondering what to invest their money in. Saving accounts, despite high security, do not increase capital, but only slightly protect against a loss of money purchasing power. This is mainly due the low interest rate on deposits. The high risk of investing in the stock market discourages many people from investing their capital in there.  The possibilities of securing their money and at the same time multiplying them with high efficiency, have been noticed on the real estate market.

TABLE 1. AVERAGE TRANSACTION PRICES OF 1 M2 OF FLAT IN Q1 2014 AND Q4 2019 AND A CHANGE IN 5 YEARS IN %

source: AMRON Centre

Analysis of average prices per 1 m2 of a residential unit in the last 5 years proves significant increases. In case of Gdansk, the change was as high as 44.12%, and Lodz – as high as 39.11%. No deposit or bond gives such a rate of profit.

In case of the primary market, the trend of buying apartments for cash as capital investments has been noticed some time ago. Those flats are often rented and therefore they become an additional source of income. The survey conducted by RynekPierwotny.pl shows that, according to the majority of real estate developers, approximately one third of all housing purchases are those finalized for cash.

For a long time, AMRON Centre has been observing the decreasing price distance between properties on the secondary and primary market. Some of market observers noticed that the value of some properties on the secondary market did not fall, but, on the contrary, increased, especially after renovation. This mechanism is used by people involved in house flipping: they buy resources which generate revenue and can be quickly resold with a profit.  For some, it has become the only form of income-earning. On the other hand, there are dozens of investors, who have misspent their savings this way.

HOW TO BECOME A FLIPPER? 

In order to become a ’housing flipper’, it is not enough just to buy and sell a flat. Such transaction should be conducted wisely, so that the profits were as high as possible, while the costs as low as possible. A lot of publications have been created in recent years that help to understand the techniques of financing real estate investments in order to ensure such investment to be safe, effective and always successful. There are also many professional training on the market for people, who want to learn from scratch how to effectively invest in real estate. According to Michał Gutowski from WIWN.PL sp. z o.o., his company has been running such workshops since 2015. ‘A significant increase in interest in this type of activity occurred in 2017. I estimate that about 3/4 of people attending the courses organised by my company start this type of activity.  However, in Poland there are several entities conducting this type of educational activity. A significant number of persons become ’flippers’ without any mentoring, which is why it is difficult to assess how many people do this type of business in Poland’ explains Gutowski.

HOW DOES IT LOOK IN PRACTICE?

House flipping can certainly be a source of very high income. However, it all depends on several factors, among others: a constant inflow of investment “pearls”, proven construction crews or the ability to make rational decisions. One ’flip’ lasts 2 months on average. In large agglomerations, offers with attractive prices and in a good locations disappear very quickly.  That is why searching for interesting real estate often requires different measures. Internet, friends or mentioned before leaflets in a mailbox, which can catch the attention of people, whose life and financial situation make them want to sell the property and quickly get cash.  It is worth to mention that there is no investment without risk.  The flipper’s success is related to his knowledge about the local real estate market. However, a problem may arise when a short-term investor buys an apartment in the price peak.  Then there are two options to choose: selling with zero profit or loss or renting in anticipation of further increases in property prices.

HOW HAS THE PANDEMIA AFFECTED FLIPPER ACTIVITIES?

In an interview with Michał Gutowski from WIWN.PL sp. z o.o. I heard that the current pandemic did not significantly affect the flippers’ activities. The effects of the incoming crisis could have been felt by people who had to sell their investments quickly to save their business, but flipping is always associated with risk.  The beginning of the pandemic, i.e. the end of March, was a period of stagnation, but now more people are inquiring about trainings and the opportunity to change profession, which may be related to the situation on the labour market.  The demand for flats will not decrease, due to still unsatisfied housing needs in Poland and the lack of investment alternatives.

Agnieszka Bartoszewska
Junior Real Estate Market Analyst