It's tough to resist the entertainment factor in those reality TV
shows like "Flip That House." But here's a little secret you may not
know: Not everything on TV is as it seems.
In fact, I would guess that based on my experience of watching people
try and flip properties for profit, 90 percent who try it once never
attempt it again.
I'm not saying it isn't possible for this to be profitable, and I
know people who do it full time and do make money at it. But the odds
are highly against the average person succeeding. However, if all those
reality TV shows have piqued your interest, here are a few items to
consider if you want to attempt this strategy.
Buy Low, Sell High
First, you will have to buy a property at significantly below market
value or sell it above market value to make money. If you buy it and
sell it at the market, you will lose money due to commissions, time, and
renovation costs. So your best bet is buying a property below market
value. That's not simply below what it sold for four years ago, it's
below what is the current market value
after taking into account all the distressed property sales in the
area. And if it's a decent property, you're probably going to be
fighting many other individuals trying to buy the same house. And when
lots of people are vying for one piece of real estate, the price gets bid up and you probably are going to pay market value.
What about adding value with a renovation? While there is no question
you can add value by renovating a property, you probably will not add
more value than the cost of that value. (Check out the Hanley Wood estimator, especially "cost recouped" column.) You
might put in a $20,000 kitchen that only adds $15,000 in value. More
than likely you will go way over budget on the rehab and spend way more
than the value you add.
Another tough challenge is the costs on both sides of your flip.
There are significant transaction costs on the buy and sell. Probably
3-to-5 percent in costs when you purchase property, and up to 10 percent
when you sell property. So you really need to sell the property — and
this is without regard to any rehab costs or holding costs — for about
20 percent greater than you paid. That's just to break even.
Those holding costs also come into play. You may think you will
resell the property in three months, and you might. But what if it takes
six months, or nine months. You will be making mortgage payments, property tax payments,
insurance, some maintenance, HOA fees, and all other kinds of costs as
you hope to get the property sold quickly. And they add up, wait until
you are the one writing the checks each month.
Fuzzy Math on This Flip
An individual I knew bought a property for $100,000 and sold it for
$140,000, netting $40,000 in six months — so he told me. Then we talked
about the costs involved. Purchase and finance costs, including $5,000
for rehab costs; $8,000 for holding costs; $6,000. He was up to $19,000
in costs before he even transferred title to the new owner. Sales costs
added about $10,000 and he gave the buyer a $3,000 credit, too. That
added another $13,000 in costs.
Here is the revised math on his flip: Sale price was $140,000, less
total costs of $32,000 ($19,000 + $13,000), less his $100,000 purchase
left him with $8,000 in profit for six months of work. So much for the
This result is more typical with profit-making real estate deals.
Some people do score on short term, get-rich=quick attempts. Most of
them are doing it full time and taking significant risks with their
Luckily. the guys flipping properties on TV are making a living
producing TV shows and getting paid by advertisers. That means their
house flipping is more theater than business. There's a much better
chance they will make a living that way then trying to actually flip
properties for a profit.
Tuesday, June 26 2012 9:00 PM EDT2012-06-27 01:00:19 GMT
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