Nashville house-flipping profits drop to six-year low as bargain homes disappear

The house flipping shows make the practice look like easy money. Buy a fixer-upper, fix it, and sell it quickly — for a tidy profit.

Now that profit is dwindling, especially in Nashville.

The average gross return on investment for flipping homes in the Nashville metro area dropped in the third quarter of 2017 to its lowest level since 2011, according to figures from Attom Data Solutions, a national property database.

Experts point to a range of reasons for Nashville’s declining profits. The supply dwindled for low-priced homes, a batch of newly-built homes are now competing with flipped homes, first-time investors made bad deals, and tighter regulations on short-term rentals has eased demand.

Nashville’s meteoric rise over the past seven years gave flippers a prime opportunity. At the peak of profitability — in the fourth quarter of 2012 — the average gross profits was 87 percent. In other words, their sales price was nearly twice the purchase price. In the third quarter of 2017, the average was 47 percent.

Houses that were sold twice within a 12-month period were counted in the data, which is derived from public records.

More: Nashville ranked third in US for home price appreciation in 2017

More: Nashville has exciting growth, uncertainty as 'IT' city

From November: Nashville area median home price falls for fourth straight month

“Nashville has been talked up so much about being the ‘it’ town,” said Troy Dean Shafer, host of “Nashville Flipped,” a show on the DIY Network that focuses on renovating historic homes. “It was only a matter of time that a lot of first-time people were going to take out a loan, and renovate a home, and think they’re going to make $50,000 on it.”

“It’s a tough city to be flipping houses if you don’t have a lot of experience,” Shafer said. “Nashville has just gotten so expensive.”

Nashville flippers are now making around the national average

The decline in the Nashville market was sharper, and began earlier, than the national drop. According to the data, flippers across the U.S. made their peak return in third quarter of 2016, at 51 percent on average. The third quarter of 2017 represented a two-year low for the U.S., at 48 percent gains.

“Home flipping profits continue to be squeezed by a dwindling inventory of distressed properties available to purchase at a discount, and increasing competition from fair-weather home flippers often willing to operate on thinner margins,” Daren Blomquist, senior vice president at Attom Data Solutions, said in a statement.

More: Nashville property tax appeals jump by 55 percent after record reappraisal

Opinion: Amazon, Nashville and the costs of growth

Home renovation and real estate speculation has pervaded America’s living rooms through an explosion of TV shows on HGTV and other networks. Since 2010, at least 40 TV series have begun airing that focused on flipping, according to a search of IMDb, the movie and television information website.

While some flippers don’t perform extensive renovations, others gut homes and basically build anew. Either way, buyers are looking for the lowest-priced houses on the market. In Nashville, the median purchase price for flipped homes climbed from $80,000 in 2011 to $136,000 in 2017.

More: Springfield lures home buyers north from Nashville with affordability, small-town charm

More: Affordable new subdivisions balance rising home prices in Sumner County

“Everybody flooded into the market, and there was a lot more competition,” said John Brittle Jr., a broker with Parks Realty. “The price of the original sale went sky-high through the roof, but it didn’t change the value of the house at the end.”

Home sellers also grew skeptical of flippers approaching them with cash offers, Brittle said, and began holding out for higher prices.

As the competition for low-cost homes grew, Nashville city officials began regulating short-term rentals, putting a crimp on one of the key drivers of the flipping market, said Shafer, the host of “Nashville Flipped.”

Investors could snatch up a renovated home in East Nashville and rent it out for hundreds of dollars a night on Airbnb or one of the other home-sharing sites. Then in 2015 the Metro Nashville Council began passing regulations, including a cap on investor-owned rentals in some neighborhoods.

“Before you had out-of-state and out-of-country buyers because Nashville was this candy store for short-term rentals,” said Shafer. “Now that it’s been more regulated, it just pulled those people out of the pool.”

On the other side of the equation, developers finished new homes in some neighborhoods popular among flippers. That meant renovated homes were competing with new homes, and sales prices began to level out.

In the Inglewood zip code of 37216, builders flooded the market with so-called “tall-skinnies.” These are new narrow homes with two or three stories, typically two houses to a lot, in place of older single-story homes.

The influx of supply eventually tipped the scale. After 40 months of year-over-year price gains, the zip code’s median sales price started to drop in July 2017.

“With so much new construction it becomes tougher and tougher to compete,” said Shafer, who’s now renovating a home in Springfield, about 40 minutes north of Downtown. “I’m priced out of Nashville.”

Reach Mike Reicher at mreicher@tennessean.com or 615-259-8228 and on Twitter @mreicher.