Home Flipping Brings Value To Society

Much like short-term rentals and institutional investors, politicians and anti-development activists often invoke “home flippers” as boogeymen fueling the housing crisis. To hear these critics tell it, they’re rapacious profiteers who take cheap homes off the market, fueling gentrification and displacement. But this caricature ignores the ways in which home flipping can improve neighborhoods and housing markets while enhancing opportunity for individuals. Flippers Increase Housing Supply and Make Neighborhoods NicerAll across America, unoccupied homes sit in poor condition, and some are outright unsafe. According to NPR, 7 million homes are in an untenable state of disrepair, with problems like sewage contamination and structural instability (relatedly, the nationwide housing shortage is estimated at between 4 and 7 million). Still other buildings remain structurally sound but have antiquated designs, use environmentally inefficient materials, and more. Not only are the homes themselves unattractive to buyers, but they harm the value and desirability of whole neighborhoods. This creates a market demand for repairs – which flippers meet so long as there’s profit incentive. They can upgrade abandoned homes to meet modern aesthetic or technological standards. Improving these properties can increase values for the neighbors – thus reversing the misfortune of dangerous and declining sub-markets. And in 2023 flipping added an estimated 309,000 single-family homes and condos to the market, accounting for 8.1% of home sales that year. So it is a bonafide way to increase supply.An Opportunity for Entrepreneurship Flipping also provides economic opportunity for flippers themselves – many of whom are young, jack-of-all-trades entrepreneurs, not big investors. Many of them enter projects with little money down, accessing various private and public sector loan strategies. For instance, they might take out home equity loans, assuming considerable risk to borrow against what is likely their main asset. Or they’ll use options such as the Federal Housing Authority’s 203(k) program, which assists homeowners with renovations. This is also used by flippers and has lower credit requirements, but requires borrowers to live in the home as their primary residence for at least a year. I know one scrappy flipper who uses the program to jump each year from house to house – not exactly a lush lifestyle.Other financing entities partner with flippers to provide the funding or at least connect flippers with resources, such as Seek Business Capital. Such mechanisms are accessible to entrepreneurs who don’t have ample capital. The profit from these flips can fund bigger endeavors, whether broader real estate investing or large development projects. But whether the flippers use their own money or others’, the risk falls on them, since they enter an industry where repairs can go way over budget or completely awry. For Sellers, More Options and Better DealsUnsurprisingly, the people who own the homes are often in a poor financial situation themselves, and can’t afford to make the repairs and upgrades necessary to sell their homes. Without flippers, they likely wouldn’t be able to sell their homes at all, since those who wish to buy for the purpose of in-home living don’t often have the appetite to make lots of repairs. Flippers have broadened the market of prospective purchasers, to the point that seemingly any home anywhere can be sold, no matter how bad its condition. Flippers are criticized for sometimes undercutting prices on vulnerable sellers, but again, without them a lot of these homes simply would not sell.

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Despite these benefits, home flipping faces criticism. Some housing advocates argue that flippers drive up home prices, making it more difficult for first-time buyers to enter the market. Others claim that aggressive flipping in certain areas can contribute to gentrification, displacing long-time residents. There have also been cases of corner-cutting by unscrupulous flippers, highlighted on social media. But a few bad actors don’t prove a trend, and they can be avoided anyway by hiring home inspectors before any purchase. Flipping also has unfavorable tax implications. Home flipping proceeds are usually taxed as ordinary income – at a higher rate (as much as 37%) than long-term capital gains. Also, if a sole proprietor does the flip, there’s a 15.3% self-employment obligation on top of that – meaning that in the worst case scenario, more than half of the flipper’s profits are taxed. And unlike most real estate transactions, flips cannot be used in 1031 exchanges, where investors defer taxation by using the proceeds to purchase another property. As a result, flipping is less lucrative than other, longer-term property investments.Because flipping helps housing markets and entrepreneurs, this ought to change. If the Trump administration and Republican Congressional majority pursue another federal tax reform plan, they can make the tax code more favorable to flipping by addressing the issues stated above.At a time when America faces a home shortage, flipping should be encouraged. It takes properties that were either uninhabitable or would get a low resale value and makes them attractive. It’s a relatively low-complexity, high-yield way to boost supply, while providing a path to entrepreneurship. Cover image use authorized under the Creative Commons Attribution 2.0 ShareAlike license.