July 16, 2018
July 16, 2018
We’ve all seen the house flipping shows on TV – Flip or Flop, Flip This House, Flip or Flop, Vegas, and Fixer Upper – but could it really be that easy? Probably not.
First of all, we all understand that reality TV isn’t…well, reality. At a minimum, a lot of the “dirty work” of house flipping takes place off-camera, out of sight from viewers. For example, we don’t see the failed flips. Those are the ones where the renovations end up costing a lot more than anticipated, or where the stars of the show didn’t make the eye-popping profits that were expected.
But that doesn’t mean that you can’t make big profits from house flipping. In general, the biggest issue is the learning curve. People who do house flipping consistently and profitably have a lot of experience. Until you reach that level, it can be a struggle.
Here are some of the obstacles you should anticipate, as well as how to overcome them.
Virtually everything in a successful flip hangs on this one single factor. Get it right, and you can make a nice windfall. But get it wrong, and your first flip might turn out to be your last!
Part of the problem here is emotional. If you’re looking to buy a house to live in, you might look for the best property that you can find. But if you think that way when it comes to a flip, you’ll undermine your whole effort.
The basic idea with house flipping is to find the least expensive property in the best neighborhood you can find. That doesn’t necessarily mean looking for a property that’s a complete wreck, but you should look for one that has plenty of cosmetic deficiencies, while at the same time being structurally sound.
Most of all, the property that you purchase must be well below the general market price level in the area.
For example, if the general market price in a neighborhood is $200,000, you’ll want to get a property for say, $120,000. Ideally, the property will require no more than $30,000 in renovation costs. That will enable you to get a profit of $50,000 on the sale, less transaction costs.
It’s virtually impossible to find that kind of property if you don’t have a strong understanding of your market area. That means staying on top of sales activity in the area so that you know what properties in a given neighborhood are going for.
It can help if you have a good relationship with some well-established real estate agents and appraisers. Since they know what properties are going for, they can provide you with information quickly on any property that you’re interested in.
In relative terms, there are very few properties that will qualify as profitable flips. That’s in large part because sellers will naturally try to get the highest price for their property, even if it’s badly deficient.
In a market area where there are 100 properties for sale, there may be only three or four of them that remotely qualify as profitable flips. Rest assured that there are other flippers looking at those same properties. The most profitable properties will always go the quickest. Experienced flippers will jump on those properties very quickly, and they have the advantage of knowing how to close on them as soon as possible.
The other issue with competition is that it can result in multiple bids on the same property. For example, if you come across a house that is listed for sale for $120,000 that is located in a $200,000 neighborhood, multiple bidders could bid the property up to say, $150,000. At that price, you may not be able to flip it profitably.
Flipping is very much a “panning for gold venture,” and there’s no way to eliminate that aspect of it.
Rest assured that for every flaw that you see in a property, there’s another one that you don’t see. For example, behind every damaged wall is the potential for termite damage. For this reason, you need to be very generous in estimating your renovation costs. If you see $20,000 worth of repairs, there’s a very good chance that that number will rise to $30,000 before you’re finished (that’s something that you do actually see on house flipping shows).
The best way to be fully prepared for this possibility is to make sure that you get a detailed home inspection by a professional inspector on any property that you plan to purchase. The inspection report will make a list of every significant defect in the property. But more important, the report will also identify structural deficiencies. Those are the ones that you should be most concerned with because they’re generally the most costly to repair.
It will cost you several hundred dollars to get a detailed home inspection. But it will be money well spent. Based on that report, you might determine that a property that looks very attractive – even based on a low asking price – will cost too much to restore.
Banks can be notoriously reluctant to provide financing for flips. For one thing, they prefer long-term loans, such as mortgages on owner-occupied properties. If they know that you will sell the house and pay off the mortgage in just a few months, they’ll lose money on the loan.
The other issue is the type of mortgage that you might get. Banks might view a flip as a commercial loan. In that situation, they will insist on a very large down payment as well as a high interest rate. They may even require that you pay several “points” for the loan. For example, if a lender charges five points, that means you will need to pay 5% of the loan amount upfront.
The most effective flips are all cash purchases. That eliminates both the time and cost that are involved in getting bank financing.
On TV, flips are always completed in a matter of a few weeks. A low priced property is identified, and repairs – no matter how complex – are completed right before your eyes. And the fact that most of these shows run for either 30 or 60 minutes creates the impression of a rapid repair process.
In the real world, renovations seldom go that quickly. The flip that you expected to complete in eight weeks might end up taking eight months.
If you have a loan on the property, the longer repair process will eat into your profits. And if you have made an all-cash purchase, your capital will be tied up for much longer.
However long you expect renovations to take, add a few more weeks on top of that estimate.
If you’re planning to do a flip for the first time, you should approach it as though you are starting a new business. In fact, that’s exactly what you’ll be doing. Because of the short-term nature of a flip, it shouldn’t be treated as an investment. It’s a business venture because your plan is to make a purchase, improve the property, and get out as quickly as possible so that you can move on to the next flip.
If you have any doubt or concern about your ability to do a flip profitably, it might be better to find an experienced flipper to partner with. You may want to do several flips within that partnership before attempting to go solo.
Flipping can be very profitable. But you also need to learn the ropes before you reach that point. It doesn’t work as smoothly as it does on TV, and you need to do your best to be prepared for how it will work as a real-world business venture.
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