Flipping a Home Isn't as Easy as it Appears on TV
I have to admit, I'm somewhat addicted to several home decorating TV shows. But there's one show on 'house flipping' I find interesting and frustrating at the same time. On the show, people buy beat up homes and try to resell them for a quick profit.
I enjoy watching both the pros and amateurs go through the process. The pros have a system of what to buy and a reliable crew who gets things done fast and on budget. And then there are the weekend warriors. These amateur flippers tend to buy a home without getting it inspected first, have a limited budget and contacts, and have an unrealistic idea of what they can resell the property for.
The amateurs usually run out of money and have to beg their relatives or tap their credit cards to keep their project afloat. On the show, the host usually asks the owners why they selected certain materials and why the construction is taking so long.
Now I'm asking my wife how can anyone buy something without going through a thorough inspection first? And where was their Realtor to help them avoid these pitfalls? What actually makes me go ballistic is when I see these inexperienced flippers make a lot of money.
The real world
But this is a TV show and it's entertainment. In the real world, flipping a home is not as easy as it appears. These shows either ignore some key expenses or quickly brush over them. There are closing costs and unexpected construction problems. And how about getting building permits? That takes more time and more money. All these things help keep the mortgage meter spinning for many more months. Another major expense these shows ignore is the real estate commission.
I would really think twice about doing a flip. Unlike the heydays of the housing boom, financing today has gotten a lot harder and more expensive for flippers. I guess it really boils down to how much risk you're willing to take for a small reward. Where I live, it doesn't pencil out based on the risk. Of course, I could just be greedy.
But if you are looking for a good opportunity and are good with home remodeling and construction, fixer-uppers can be very rewarding. It's best if you buy one and spend the next two years improving it. This way when you sell it, all your profits will be tax-free as well. But whatever you do, get the home inspected thoroughly. It's important for you to uncover the problems before you own it and have an opportunity to back out without consequences.
But the hardest part of buying a fixer-upper may be convincing your wife to live with sawdust and contractors for the next two years — and then do it again.
Steven Hyman is the broker and owner of Century 21 Sunset Properties Half Moon Bay, CA. He can be reached at www.century21sunset.com
Comments
I was dissappointed to read all of the negativity coming from someone in the business. Buying and selling homes is a business. It is no different than buying cars, furniture, or any widget at wholesale and reselling it at retail. I agree, you deserve to get burned in anything you do if you don't do your homework. Getting burned doing your own thing is a learning tool if you are a positive thinker and don't give up easily. Those are the lessons they don't teach you in business school. Just had to pipe in on a positive note. If I had listened to this type of advice early in my career, I would still be trudging through the corporate world and wouldn't own my own businesses and invest in real estate as well. I'll bet you wouldn't have taken a commission only job either. By the way, I love it when I see the rookies make out big on a house deal. Why wouldn't I? My best advice to newbies in the business (especially in Half Moon Bay) is to be creative in selling your houses and save the 6%. You are 100% sure that you have a vested interest in your own success. Get a good real estate attorney for contract review and list your house yourself on the MLS for under $500. The newspaper will let you run a real estate ad. Read a few gorilla marketing books. Sorry Steven, I felt obligated to throw a little back at you. In closing, I admit real estate investing is hard work, but so is commissioned real estate sales. I don't believe hard work ever killed anyone. It is fear, worry and other negative feelings that will put us in an early grave. Best regards, Jim R.
As I said, flipping is a combination of experience, location and level of risk/reward someone is willing to take. I happen to live in a very expensive part of the country where homes start at $600,000 and go up into seven figures. We have fixers in every price category. So if you buy a home, say, for $750,000 and the home needs $75,000 of improvements. Add to that maybe $5,000 for closing costs, $75,000 down payment, 5 months of carrying costs (at $4500 a month) of $22,500 and a 5% commission to sell it. Now you are into this for over $900,000 with $175,000 of your cash. If you can get $1 million, you will make $100,000 on a $175,000 investment. But let's say you can only get $935,000. Is a $35,000 profit worth the large investment. ? That's depends on people's risk/reward comfort zone. With Murphy's Law always waiting to rear its head, you know there will be more unexpected costly problems. A scenario like above wouldn't convince me to take the plunge. Again, every area is different and so are the parameters. I also like to think that I give people honest sincere advice. I don't promise the moon. Maybe that's why I've been very successful with most of my business coming from happy repeat customers. Hope that helps. Thanks for your comments.
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