Home flips, an important measure of housing market activity, declined 35% in the third quarter of 2013. Flipping a house — which involves buying, renovating and then reselling it — peaked in popularity in the fourth quarter of 2012, when more than 67,000 homes were flipped. As of the third quarter of this year, nearly 33,000 homes were flipped.

While the market is down overall, investors in some areas are still seeing returns well above the national average of $55,000. The average gross profit on a home flipped in San Jose was more than $166,000, the highest in the country. Based on figures provided by RealtyTrac, an online housing data provider, 24/7 Wall St. examined the 10 markets where flipping a home produced the largest gross profit in the third quarter.

Click here to see the best cities to flip a house

The number of flips also has dropped in the best markets. Compared to the same quarter last year, home flips across the United States declined by 13%. Just two top markets, Oxnard-Thousand Oaks-Ventura, Calif., and Seattle-Tacoma-Bellevue, Wash., had year-over-year increases in home flip activity.

“Fllippers are not just running rampant, they’re backing off when the opportunity closes in terms of finding those distressed properties and converting them to quality homes,” explained Daren Blomquist, vice president at RealtyTrac. Several factors were forcing home flippers out of the market, including a lack of distressed inventory, added competition from large institutional investors, as well as rising home prices and interest rates.

All but two of the most profitable markets for home flipping last quarter were in California. “Coastal California is one of the most desirable markets in the country,” said Bloomquist. This high demand is one of the reasons people were able to flip homes successfully in these markets.

In most of the top cities for home flipping, buyers paid among the nation’s highest prices for distressed properties. The average price paid for a distressed property nationwide was $219,412. In half of the top markets for home flipping, buying a distressed home to flip cost, on average, more than $400,000.

Of course, these expensive markets produce even larger returns. “Flippers are able to make a bigger gross profit per flip in these markets with much higher price points,” Blomquist said. The average gross profit on a flip in eight of the 10 markets was at least $100,000.

Based on figures provided by RealtyTrac, 24/7 Wall St. examined the 10 housing markets where flipping a house produced the highest gross profit in the third quarter of 2013. A flip is defined by RealtyTrac as a sale of a single-family home purchased up to six months earlier. Markets with less than 50 flips were excluded.

These are the best cities in which to flip a house.

10. Vallejo-Fairfield, Calif.
> Avg. gross profit: $92,538
> Flipped price: $304,346 (14th highest)
> Number of flips: 75
> Change in flips Q2 to Q3: -34%

People who flipped homes in Vallejo in the third quarter of 2013 bought their property for just under $218,000 on average. This was roughly in line with the national average for these purchases. But those sellers received more than $304,000, one of the highest average flip prices in the nation. A flip in Vallejo returned more than $92,000 last quarter, higher than in most markets. Despite their profitability, home flips in Vallejo during the third quarter actually fell by 34% from the previous quarter and by more than 50% from the same quarter of the previous year.

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9. Seattle-Tacoma-Bellevue, Wash.
> Avg. gross profit: $97,002
> Flipped price: $319,280 (13th highest)
> Number of flips: 485
> Change in flips Q2 to Q3: -32%

Home prices in Seattle have been rising since early 2012, according to the S&P/Case-Shiller Home Price Index. At the same time, home flips rose considerably, peaking at 711 in the second quarter of 2013. However, in the third quarter, flipping activity declined by nearly a third compared to the previous quarter. Home flipping remained profitable with an average gross profit of $97,002 per home. One reason for the lower activity may be tight real estate market in the area, which reduced the number of opportunities to buy homes to flip. Bloomquist expects inventory to rise.

8. Salinas, Calif.
> Avg. gross profit: $100,228
> Flipped price: $438,333 (7th highest)
> Number of flips: 69
> Change in flips Q2 to Q3: -10%

Salinas, a major agricultural producer, is located in the central coastal region of California. Compared with other housing markets where home flipping is profitable, the number of flips has been relatively low in the past few years. Just 69 homes were flipped in the most recent quarter. Average gross profits from home flipping increased by more than $40,000 when compared with the same quarter last year.

7. Santa Rosa-Petaluma, Calif.
> Avg. gross profit: $113,001
> Flipped price: $411,909 (9th highest)
> Number of flips: 125
> Change in flips Q2 to Q3: -18%

The Santa Rosa-Petaluma area makes up Sonoma County, a major part of California’s Wine Country. Since the start of 2012, home flipping activity has increased, peaking at the end of last year with 197 homes flipped in the fourth quarter. However, activity has declined as of the third quarter of this year. The area remains expensive. While the average purchase price for a home that was later flipped was quite high — nearly $300,000 — the same homes were sold for nearly $412,000 on average, higher than all but eight other cities.

6. San Diego-Carlsbad-San Marcos, Calif.
> Avg. gross profit: $120,180
> Flipped price: $475,306 (5th highest)
> Number of flips: 900
> Change in flips Q2 to Q3: -22%

In recent years, home flipping activity in San Diego has surged. In the first quarter of 2011, just 285 homes were flipped. At its peak, in the second quarter of this year, flips totaled 1,160. But higher prices and higher mortgage rates have removed some of the appeal for buyers in general, according to the San Diego Union-Tribune. Coupled with a decline in the number of available distressed properties, home flipping also may have become less appealing. The number of flipped homes dropped by 22% from the second to the third quarter of 2013. Flipping was still profitable last quarter. The average gross profit on flipped homes was more than $120,000, up from fewer than $89,000 last year.

5. Los Angeles-Long Beach-Santa Ana, Calif.
> Avg. gross profit: $127,634
> Flipped price: $513,975 (3rd highest)
> Number of flips: 2,116
> Change in flips Q2 to Q3: -9%

Despite declining 9% since the last quarter, Los Angeles had the largest market of home flips in the country with 2,116 turning over. Home prices, too, have leveled off throughout Southern California as a result of rising mortgage rates, increased inventory of homes for sale and lower investor demand. Still, an average flipped home sold for close to $514,000 last quarter, more than all but two other housing markets nationwide. The area may still have some appeal left for investors. Spike TV show “Flip Men” star Doug Clark told RealtyTrac that many of the hot spots such as Los Angeles “have many areas in disrepair with low-priced inventory, making flipping an attractive option.”

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4. Ocean City, N.J.
> Avg. gross profit: $140,716
> Flipped price: $467,113 (6th highest)
> Number of flips: 53
> Change in flips Q2 to Q3: -36%

Ocean City flipping activity dropped off considerably last quarter, when barely 50 homes were flipped. Gross profits have risen substantially in the past year, however, from $18,542 in the third quarter of 2012 to $140,716 in the third quarter of 2013. This is despite the fact that the average price paid on a home that was flipped was more than $427,000. Overall buying activity in the area’s housing market may soon pick up as the city continues to recover from Superstorm Sandy.

3. Oxnard-Thousand Oaks-Ventura, Calif.
> Avg. gross profit: $143,578
> Flipped price: $510,906 (4th highest)
> Number of flips: 197
> Change in flips Q2 to Q3: -8%

Home flips in the Oxnard metro area, which consists solely of Ventura County, have dropped roughly 8% in the past quarter. This was the smallest decline of any top market for home flipping, and well below the nationwide decline in flips of 35%. Ventura County flips were among the most profitable in the country. However, Ventura County was one of the least affordable real estate markets in the country.

2. San Francisco-Oakland-Fremont, Calif.
> Avg. gross profit: $154,130
> Flipped price: $621,380 (2nd highest)
> Number of flips: 584
> Change in flips Q2 to Q3: -50%

Homes purchased for flipping in the San Francisco housing market are some of the most expensive in the country, at just under $500,000 on average. According to SPUR, an urban planning nonprofit, there was a surge in new housing and construction projects in San Francisco last year, with more than 4,220 units started, compared with only 269 the previous year.

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1. San Jose-Sunnyvale-Santa Clara, Calif.
> Avg. gross profit: $166,287
> Flipped price: $704,762 (the highest)
> Number of flips: 202
> Change in flips Q2 to Q3: -39%

Like many housing markets in California and across the country, home flipping activity declined in the San Jose metro area. As of the third quarter of this year, just over 200 homes were flipped, down nearly 40% from the previous quarter. Gross profits from home flipping, however, were nearly three times the national average, at more than $166,000. This was also up slightly from the year before. On average, a flipped home sold for more than $700,000 in the third quarter of the year, by far the highest of any housing market in the nation.

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