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Why flipping houses is harder than it used to be

Flipping houses, which many Americans thought was a pathway to easy riches before the collapse of the real estate market during the Great Recession, is on the decline nationally thanks to tighter credit standards and dwindling supply of properties that can be easily spruced up for a profit. This is good news, according to some real estate observers.

According to data released today by RealtyTrac, 136,269 U.S. family homes were flipped in 2014, or about 5.4 percent of all single-family home sales -- the lowest share of flips since 2011. There were 32,578 flips in the fourth quarter, representing 5.3 percent of all single-family home sales. That was down from 12 percent a year earlier. RealtyTrac estimated that the average gross profit -- the difference between the purchase price and the flipped price -- was $65,993 in 2014, up slightly from $65,285 a year earlier.

"This shows that the market is being rational," said Darren Bloomquist, a RealtyTrac vice president, in an interview with CBS Moneywatch.

Many flip deals are now done in cash because credit standards are tighter than they were during the heyday of the bubble. As a result, many first-time homebuyers who flippers would want to target are being shut out of the market. Financing deals for flippers also can be more difficult as banks are leery of getting burned.

The reluctance of banks and other private sources to lend is understandable. During the bubble, banks such as Countrywide Financial marketed so-called no-doc loans in which people didn't have to provide proof of their income to get a mortgage. When the real estate bubble bust, many of these mortgages became toxic after the property became worth less than the mortgage that was underwriting it. These loans were eventually bundled into securities that were resold to investors, which were not adequately informed of the risks. As a result, Bank of America (BAC), which bought Countrywide in 2008, eventually agreed to pay penalties nearing $17 billion.

"The biggest difference is access to financing," said St. Louis-area realtor Mark Butler in an interview, adding that when he began his career in real estate in 2006. "You could pretty much put a sign in front of any house and it would sell."

The other challenge facing flippers is finding quality inventory. Prices increase for single-family homes also is slowing, squeezing the profit margins of investors. Indeed, the closely watched Case-Shiller Index reported that it saw a 4.3 percent gainin 20 major cities in the 12 months ended in December. That was its smallest gain since 2011.

"It's competitive out there," said Mabel Guzman, past president of the Chicago Association of Realtors, adding that investors often have to compete for properties. "We run the numbers constantly. If you are new to rehab, you better have a good team put together. If you don't you are going to wind up sitting on the sidelines."

In many markets the inventories of prime bank-owned properties that can be fixed up for a quick flip is dwindling, according to realtors. This is forcing investors to take bigger risks in properties that are in less desirable neighborhoods and is forcing some to rent out properties that fail to sell.

"As home price appreciation slows to single digits in most markets, flippers need to be more selective and creative about the properties and neighborhoods they target," Bloomquist noted in a press release.

Flipping continues to be a significant part of some real estate markets such as Detroit, Los Angeles, Memphis, Miami and Jacksonville, Florida, which according to RealtyTrac account for 25 percent or more of all single family home sales during the latest quarter. The most lucrative markets featuring the highest gross returns were Baltimore, St. Louis, Jacksonville, Florida, Chicago, Detroit and Washington, D.C., according to RealtyTrac.

Even in hot markets, real estate investors are proceeding more cautiously than they have in the past.

"There is a whole new breed," said Ross Mackesey, president of the Greater Baltimore Board of Realtors, in an interview. "Flippers understand the economic model much better now. There aren't as many naive flippers."