Flipping Houses Is Not as Easy as It Looks on Television
Now is probably not the best time for house flipping, but even in the recent boom market when houses in many locations were virtually selling themselves, amateurs who were convinced from watching too much reality television that buying the right property, fixing it up and selling it was the way to make a quick buck were probably guaranteeing more trouble for themselves than they had imagined, according to Scott Frank and Andy Heller, two executives who have succeeded in making residential real estate their sideline for 15 to 20 years.
“Most people want to get into house flipping to make a quick buck,” said Heller. “It usually doesn’t take them long to find out that while that is possible, fast profits are the exception rather than the rule. And success rarely comes easy.”
Frank and Heller, in their new book on the subject of regular people amassing real estate riches, provide five caveats about flipping:
- Flipping can be extremely time-consuming. Many people aren’t prepared for the time commitment, particularly during the buying phase. To profit, the authors advise buying at a deep discount, often 25% or more, which is not always easy to find.
- Costs can get out of hand. When properties are available at a big discount, it's usually because they will require significant repairs before they can be resold. And when the repairs are made, the buyer needs to be careful of not overdoing it. “There is a difference between remodeling a property and making necessary repairs,” says Heller. “When you calculate your repair and improvement costs, they should be based on putting the property in comparable condition to those surrounding it….Repair broken windows and fix a leaky roof, but don’t put in a new swimming pool simply because it will make the house more valuable.”
- Housing-flipping is a stress-filled business. Profits aren’t realized until after the house is resold, and every day eats into the flipper’s gains. Unless a real estate agent is being used, which will cut into the profits, the flipper will have to deal with many people who are interested in buying the property. As the house remains unsold, holding costs — including utilities, mortgage payments and advertising – will continue to eat into the budget. Adding more stress, the flipper will have to decide at what point it’s best to reduce the sales price or bring in a real estate agent.
- Flippers may end up with a property that is hard to sell. The cyclicality of the marketplace aside, flippers can make the mistake of buying a home with repairs that can’t be fixed if it’s in a bad neighborhood, is too close to a busy street or was built on a steep hill.
- Unexpected costs can ruin a flipper’s profits. To ensure that there are no surprises after the property has been purchased, the flipper needs to make an appointment with an inspector while the contract is being finalized. The inspection report will spell out any problems with the property the flipper wasn’t aware of, ensuring that all problems are identified and assessed, repair costs are understood and the workers are lined up to fix things. Most importantly, it provides an opportunity to reopen negotiations and ask for additional discounts to cover the unexpected repairs.