'Flipping' Houses Isn't Easy
Posted by David Rosenfeld on Aug 10, 2012 - 1:10:44 AM
LOS ANGELES—The popularity of reality shows on so-called “house flipping” has given many a peek into a previously obscure segment of the Real Estate market.
In simple terms, “house flipping” is merely purchasing a damaged or aging property for a low price, then repairing and upgrading in order to sell it quickly for a profit. It seems simple and even easy if you watch flipping experts on television as they seemingly make huge profits on oftentimes dilapidated properties.
But the reality is that it’s not as easy as it seems. You must be prepared for the demands of rehabilitating a troubled property. It’s definitely not for the faint hearted or those hoping for a quick buck with minimal effort. Knowing your costs, being aware of the amount of time you can devote to the work, getting the financing, and identifying the property are just the beginning. I strongly urge those looking into house flipping to look elsewhere unless you’re prepared and committed to this effort.
Once you are, the first challenge is to find the suitable property to flip. Work with a realtor to do this and to ask them for other advice. Unlike on television where properties are a few blocks away from your home, the truth is that a property could be miles away in another county or across town. Going back and forth every day for weeks on end until the work is finished is just one challenge. Examining and inspecting the property to identify problems is another challenge in itself, as some of these issues may go undiscovered until much later, causing yet more problems.
As you develop your repair and other costs for your budget, you must find suitable financing which these days isn’t easy. Oftentimes, you’ll have to find private financing from hard money lenders or friends willing to invest in your effort. This, however, will mean loans at high rates between 7 and 15 percent for the most part and may not likely cover all your needs.
Being properly capitalized is the key to any Real Estate deal, especially when it comes to flipping houses. It’s not unusual for problems to come up, as I mentioned earlier, and if you suddenly discover the bathroom plumbing needs major work and you don’t have the cash on hand for it, you can’t simply back out of the deal. Your lenders will come after you and take your home if that was part of your collateral. That’s why house flipping is not for the weary.
Finding the right contractor who is experienced and will do the work right at a reasonable rate and on time is yet another issue that’s not as easy as it would seem. Repair costs can make or break you when it comes to house flipping so that’s why some of those that do this for a living are swinging a hammer on the project and working away as much as they can because this is a full time job. You can’t hand over the reins to someone else and later ask how it’s going. You’re asking for trouble if you do that.
Another challenge is getting the proper permits for the work from the city. Dealing with bureaucracies may not be your cup of tea, but without these permits, city inspectors will demand your work be torn down and you’ll be forced to re-do it all at a huge cost.
The whole point of house flipping is to add value to a property so it can be sold at a much higher price than you bought it. So when it comes to bringing more value, many house flipping pros add square footage to a property like a guest cottage or adding an additional bedroom or bathroom. Ideally, you’d like to have a house with three bedrooms and two bathrooms.
But once your work is done and you have a buyer in hand, it may not be over just yet. It’s not unusual for problems to be discovered in the middle of escrow and you’re suddenly spending potentially thousands of dollars to make repairs to save the deal. Even then, your profit could be minimal and not the hundreds of thousands of dollars some may claim.
With so many complications and possible deal-breakers, house flipping isn’t for everyone. If you can get paid more for working extra hours at work, I’d advise you to do that rather than consider flipping a house. It’s something to think about.
David Rosenfeld is a Real Estate broker and president of Advantage Real Estate, a Real Estate and investment firm in Santa Monica, and a Rotary Club member. He has more than 20 years experience in commercial and residential property investments and financial counseling.