“New-home sales indicate that single- family home construction will continue to rise during the second half of the year.” – Rodrigo Sermeno, Kiplingers
TOP STORY – How to Flip and Not Flop
It’s called flipping: Buying a home at a low price and re-selling at a higher one, usually with some value-added improvements.
In the past few decades, flipping has evolved from an activity involving a small number of do-it yourself investors to something like a national pastime. In a country that loves get-rich-quick stories, flipping has become widely popular.
“House flipping has become the day trading of the first decades of the 2000s,” says Investopedia, a personal finance website.
Possibility of Profit
So, to answer the Number One question: Can people make money by flipping houses? Yes, followed by a long list of caveats. Successful flippers are often skilled in finance, real estate and construction. They understand risk and know that not every experience will be optimal.
Would-be flippers should also keep in mind that adding value to an aging home is a team effort, according to moneywatch.com. “Just because you have bought a home, sold a home, painted a home, doesn’t mean all the skill sets to flip a home are there.”
“To be a successful home flipper, you’ll need a lot of friends,” moneywatch.com goes on to say, “…not to mention real estate agents.”
Why are Realtors important? They are experts in marketing, locating properties, negotiating the best price for the property, and closing the deal on time.
So how much money can one make? As opposed to windfall profits, the profit potential is moderate to good. After all your expenses, that profit often comes to 20-33%, although some investors have reported much higher profit levels.
One real estate investor who blogs about flipping says his average profit is about $30,000 per project. So far, his results have ranged from a $10,000 loss to a $100,000 profit.
Risk Is a Factor
So, it’s possible to make money by flipping if you have the necessary skills and are willing to take on the risk. Financial success in flipping is far from guaranteed, however, according to investopedia. In the bid to make a profit, “far too many would-be real estate moguls overlook the basics and end up failing.”
Luck is also a factor in flipping: Investors need favorable market conditions, which are obviously out of the control of any one person. Of course, the market winds must be blowing in your favor, as well. The home market has shown steady growth in the past seven or so years, however.
At the same time, history has shown that an economic panic or banking crisis, for instance, can bring price appreciation to a sudden halt, or even a fall. If a market crisis occurs while investors are working on flipper houses, they could end up owning those homes – and paying for them – for fat longer than they had originally planned or budgeted for.
Seeing the Diamond in the Rough
For now, assume, the market is good and the time is right. It’s time to identify a property to flip.
The successful flipper is a person who can look at an outwardly unsightly property and see the potential attractiveness beneath the grime and deferred maintenance. One such flipper is writer Beth Franken, who has been posting updates in the Chicago Tribune about a seven- month-long process to flip a Cook County, Illinois home.
To be a flipper, she writes, requires “a kind of willful blindness” Some people can walk into a house and “imagine the possibilities,” continues Franken. “Others can’t see past the rotting sills; the cracked windows; the chipped, curling linoleum; the porch stairs that are a death wish — and so the home’s potential is lost on them.”
Investors must also have a keen sense of local market conditions. “Stick with the age-old adage of buying the cheapest home in the nicest neighborhood,” a Chicago-based lender,-who specializes in flip financings told realtor.com.
He recommends picking a house with “good bones.” According to realtor.com, that means a home that is “structurally sound, has a decent roof, newer windows, and an HVAC system that’s less than 10 years old, as well as modern electrical and plumbing.’
The discerning flipper will avoid homes that need major structural work, according to realtor.com. To be profitable, a flip “should need only cosmetic changes such as new cabinets, countertops, flooring, and paint.
“These renovations can usually be done without the delays of permits, plus the upgrade costs will be relatively fixed, helping to eliminate unforeseen expenses…. And always look for homes in neighborhoods close to public transportation or in good school districts as they tend to sell quickly.”
A Financial Cushion for the Unforeseen
Now it’s time to finance the flip. As it turns out, financing a flip is not much different from buying a regular home, according to realtor.com.
“You’ll either pay cash or take out a mortgage-just consider going for a 10- or 15-year mortgage, which will offer a lower rate. After all, odds are you won’t own this home for long anyway.”
Flipping relies heavily on “sweat equity,” that is, doing the work yourself. The idea is to keep labor costs at a minimum and, by so doing, boost the eventual profit.
The big assumption about sweat equity, of course, is that you know how to do the work. This is one reason why many flippers are often construction contractors who do flips as side projects.
Be Realistic About Your Skill Level
One problem for people who are handy but not full-time construction pros is that they can sometimes rate their own skills too highly.
WEALTHIER BUYERS MAY BOOST HOME SALES
“The fundamentals (of the market) are still growing: New home sales are still growing, income is still growing, employment is growing, interest rates are not that high and have not that much impact on sales. It looks like we came through the spring selling season strongly… I think we are still going to see (more) home sales growth…You also hear about a wealthier buyer; there’s a difference between a first-time buyer and a low- income or affordable-level buyer…. We still think there’s a lot of room for (people) who are buying for the first time in their 30s to buy a high-level or mid-level luxury home.” – Megan McGrath, CNBC
All too often, “flippers better plumbers, dry wall hangers, and carpenters than they New York-based real estate financier. “This ends up being a major drain of time and resources, because you must redo work and spend twice the amount of money fixing it.”
“This means that finding contractors who do quality work quickly is key to your success. For that reason, it’s crucial that you do your due diligence before you hire one: Meet with at least a few contractors, get their license number, references, and an estimates….”
The same is true with Realtors: They are professionals in home sales. Don’t assume you can do equally well without them.
Mistakes Can Break You
Even with hands-on skills and adequate financing, however, unexpected problems can arise – and they can be costly. That’s what a Huntington Beach, CA-based investor, discovered in one of his early projects in 1994.
“I bought a house with a bad foundation and lost $30,000 on the deal,” the investor tells realtor.com.
To make money, runs the adage, you need to spend money. Many would-be flippers tend to underestimate expenses.
“Repairs always cost repairs always show up when fixing a house,” says one expert quoted in the magazine. “I always assume there will be 20% percent more in costs than I calculate on each deal.”
Have a Plan B
On a similar note, flippers should have alternative designs and details that are less costly, if projects go over budget. The same goes for materials, according to one New York Realtor.
“If you’re planning to use high-end and hard wood flooring priced at $5 per square foot,” he says, “have a nice backup at $2 per square foot.
And there can be regulatory surprises. In the case of the Chicago Tribune’s Franken, a separate carriage house on the property turned into an expensive nuisance. The carriage house was in poor repair, and demolition was the only option if she was going to make money on the flip.
Before the old carriage house could be torn down, however, Cook County required environmental testing for asbestos. That meant tests and reports from certified environmental engineers, so she could get a demolition permit from the county.
“You have to have the abatement guy come, he cuts the windows out, puts them in a plastic bag, puts the plastic bag in another plastic bag, tapes shut the plastic bag, the whole process takes him all of 15 minutes,” she recounts. “Then he hands you a bill for a gajillion dollars, which he has to do to cover the disposal fees and the permits “
MAJORITY SAY HOMEOWNERSHIP A GOOD INVESTMENT
Eight out of 10 (respondents to the National Association of Realtors 2017 National Housing Pulse Survey) believe that the most important financial reason to own a home is that the money spent on housing goes towards building equity rather than to a property owner. Paying off a mortgage and owning a home by the time you retire is the most important financial reason for buying a home followed by ownership for being a good investment opportunity to build long-term wealth and increase net worth.” – National Association of Realtors
Know Your Limits
Even without an unforeseen problem, a realistic sense of one’s limitations is another useful trait in a flipper. Often, it’s better to pay a professional to do a job that is beyond one’s skill set.
Another suggestion for flippers: When you are nearing the end of the project, you should resist the temptation to put the home on the market before the work is finished. Keep in mind that the unfinished home may not look as promising to an outsider as it does to you, warns an Atlanta, GA-area real estate agent quoted in realtor.com.
“Many people don’t have vision and can’t really see how things will look once they’re done,” he says. “Also, missing molding, trim, and other details that may seem minor to you can reflect poorly on what the buyer perceives the quality of the renovation to be.”
Don’t Fall in Love with Your Flip
Developing a sense of attachment to: your project is an understandable issue, given the amount of time and effort that goes into improving a home. Experts, however warn not to fall in love with your flip.
“Don’t get attached to the house, because you’re not going to live there,” says that Huntington Beach investor. This can be especially difficult to achieve if you have lots of “sweet equity” in the property.
One the same score, flippers should avoid indulging their personal tastes in colors, and opt instead for white and other neutral colors like beige and taupe.
Another difficult part of the balancing act, at least for Franken, was to take care of her personal home after spending nearly every waking hour on the flip project or blogging. The place was a mess and the floor were unvacuumed. Franken says she felt touched or possibly a pleasant sense of irony, when her teenage sons, who were not exactly neatniks themselves, were begging mom to come home and do some housework.
YELLEN SAYS: ECONOMY GROWING
“The economy is now in the ninth year of one of the longest economic expansions in American history. The economy added 180,000 jobs a month on average in the first half of the year, about the same pace as the first half of 2016, even as unemployment rates dropped to pre-crisis levels. (Janet L. Yellen, chairwoman of the Federal Reserve Bank) said growth had picked up after a slow start to the year on stronger consumer spending and business investment. ‘A strengthening in economic growth abroad has provided important support for U.S. manufacturing production and exports, she added.” – New York Times
The Balancing Act
In the end, flipping is not much different from other forms of real estate investment: Success required a balancing act of catching the market at the right moment, awareness of local demand, and adequate financing with a margin of safety.
Flipping also calls for a big investment of your own time, and profits may not be greater, in the end, than the salary you could earn working a conventional, 9-to5 job.
But if you have the skill, the financing and the tolerance for risk, perhaps flipping might work for you. All you have to do is find a suitable home to flip in this extremely competitive market.
Don’t Go It Alone
One more thing: Finding a suitable property and selling it for the best price requires working with a qualified real estate professional who knows how to market your property effectively and close the deal.
Realatrends has been selling real estate in Laguna Beach since 1983. Please check out our other News articles for updated real estate market information. If you are looking to purchase or sale a home give Clark Smith a call at 949-494-8830