“Take my house, please!,” a motivated seller may plead. An investor, seeing a quick purchase and sale of an ugly duckling property at a princely profit, thinks “I can flip this house. It has reasonable refurbishment potential and I can make a nice profit. In fact, I’ve quit my job and I’m flipping real estate fulltime!” So go many television infomercial and advertising blocks of house flipping shows. This process of buying a real estate property and, quickly soon after, selling it (after making modest improvements) at an appreciable profit is called house flipping.
The assumption is, that to “ Flip This House,” it would be unethical to make a nice profit at the expense of the compromised seller. Many buyers and sellers of real estate subscribe to caveat emptor or “let the buyer beware.” The practice of flipping houses is not inherently bad. Many investors see the profit potential in buying distressed properties located in nice neighborhoods.
For a small investment, the buyer can cosmetically improve a neighborhood eyesore with a few nails and coats of paint. The improved house now complements the neighborhood and is soon put back on the market. After the sale, the investor makes a nice profit, and the newly refurbished house adds value to the neighborhood. Everyone wins.
House flipping gets a bad reputation when speculators start disrupting local housing markets, especially in hot markets. Groups of speculators can come into an already hot market and abnormally drive housing pricing up even further by the helter skelter buying and selling homes to realize quick profits. Like locusts to cornfields, housing affordability is quickly eaten away. In the early 1990s, runaway speculation helped fuel a recession in Texas.
Many unscrupulous speculators commit fraud, spurred by the obsession to make the most money in the shortest period of time at whatever cost or consequence. For example, a speculator may acquire the services of an appraiser and convince or bribe him to artificially inflate a house appraisal to realize a higher profit. Since a recent spate of appraisal fraud in house speculation, new real estate regulations now require two or three appraisals, each from a different source, and each appraisal is more closely scrutinized.
Undervalued homes and foreclosures are the main diet of many an honest investor. Currently, undervalued homes are few and far between, but they exist and can be found with some persistence. The investor may need to look in fringe areas or in less populated areas to find potential profits. With a minimal investment many unsightly homes can be refurbished and their profit potential realized.
Many motivated sellers need to put their homes up for sale, which are undervalued by necessity. Motivated sellers can be found on websites and in the newspaper home advertising, sales section with phrases such as “motivated seller” or “must sell.” But be careful. Some motivated sellers use this verbiage as a ruse used to attract unwary buyers to money pits.
Foreclosures are also favorites of speculators. The Department of Housing and Urban Development ( www.hud.gov), Fannie Mae ( www.fanniemae.com), and Freddie Mac ( www.freddiemac.com) Websites and local newspapers contain foreclosure property listings and information. Foreclosures come with considerable risks. Most foreclosures may require a lot of improvement. The investor will have to net the equivalent of the real estate agent’s commission upon the sale just to break even.
The investor should mitigate property improvement risks by ensuring that “ fixer-uppers” appeal to prospective buyers in the local area. The house should complement the rest of the houses in the neighborhood, that is, don’t buy a nice house in a run-down neighborhood.
Lastly, get the most bang for the buck. Most compromised homes profit from cosmetic improvements. Many home blemishes are easy and cheap to fix. Interior walls, exterior siding, trim, and so on can be fixed at a nominal cost. And curb appeal counts a lot, no pun intended.
I agree with the previous poster. It is harder than it looks to make money being a flipper. I’m a full time realtor here in Vancouver Canada and I’ve seen a few people give it a try. The problem you face is that the house has to be very well purchased when you start. This is not as easy as it sounds. Very few sellers will accept less than what they perceive to be market value. In fact, most sellers overestimate the value of their own home.
Here in BC foreclosures are regulated by the courts and the judge has a duty to get as close to fair market value as possible for the person foreclosed upon. I’ve seen many foreclosures sell higher (lots!) than they are worth. People get excited and overpay thinking it’s a deal when it’s not.
For example, I recently had a listing that I thought was underpriced at $464,900 that sold for $459,000. If you purchased that home your property transfer tax would be $7180.00 and Legal fees about $1,000. You are now at $467,180 on a home that absolutely would top out at $520,000 for the neighborhood.
Start your renovations, in this case it needed paint, flooring and landscaping (no grass in backyard- all raised vegetable gardens) plus 3 original bathrooms. I figured conservatively $20,000 would evaporate quickly. We’re now at $487,180 without factoring in at least 2 mortgage payments or Realtor fees for the sale if you don’t sell it yourself. Figure $15,000 for agents and you’re at $502,180 without interest payments or the legal fees you’ll spend again when it sells. If you can sell and close within 2 months of starting the project you might make $15k gross.
Flip This House and other cable shows do make flipping houses look easy and profitable. That is the draw of the show the producers are trying to convey to get you to watch.
But look closely at the shows. Let’s take a look at “ Flip This House” since it is the show you mentioned.
I think you will notice that the show will use the same group of investors quite often. With the exception of a few, A&E seems to be stuck on Sam and his group in Atlanta, Trademark Homes in South Carolina and the Montelongo’s in San Antonio I believe.
What you rarely see is an individual or a group of friends flipping houses. Instead you get these investors that have made a business out of flipping houses rather than just a profitable hobby many watchers would start out as.
These businesses have their own SALES TEAM for when the house is finished. They don’t pay a realtor to list the houses, they do all that in-house.
These businesses also have MONEY, known as capital. They can come in and buy a house, spend tens of thousands of dollars making improvements and never worry once about their car payments.
So think about the individual that watches these shows and decides that is what he/she wants to do.
They first need to spend time and probably a bit of gas money to find the home they want to flip. Certainly it is easy to find a house to buy but with the home-improvement craze many homes are already remodeled or need nothing done to them to help them sell. After all, A&E also has a show called “ Sell This House!” so how many home-owners looking to sell their home follow advice of that show before they sell their home?
So you find a house to flip. How will you pay for it? Purchase it and move into it while you remodel? Not a bad idea but will you be able to afford the mortgage AND the cost of repairs to the house?
Can you stand to live in a house where there are studs exposed and the need to have a porta-potty in the back yard because the remodel of the bathroom took a bad turn?
Once you have completed the remodel (let’s hope it went as planned) and are ready to sell it will you make much money after all the costs to list it and sell it?
Sure there are cable shows that make home improvement easy. Thank the magic of editing for some of that. Thank experinced flippers to that as well. Those are 2 things first-time flippers do not get the benefit from when they start what they might think is an easy flip.