There seem to be a plethora of TV shows, about young entrepreneurs getting rich by flipping houses. The idea is straightforward: you buy a house in poor condition, make necessary repairs, install new kitchen and bathrooms, and do some landscaping. You attempt to do this in less than 8 weeks or so, (so your pofits aren’t eaten up by mortgage payements. Hopefully, you’ve added 100K$ of value with an expendidture of less than $40K-leaving you a hefty profit.
I know this is being done, but I don’t think its all that easy to do today. For example: if your house sits on the market for months, you can lose 9big time). A house down the street from us looks to be in this situation-it was gutted and rebuilt-but nobody seems to want it.
Is this a bad time to try to flip?
The only reason right now may be a bad time to flip is because one can’t be sure of the market in the near future. After that ~8 week construction time, things might swing too wildly to be able to predict. That said, any market can handle a flip if you buy it at the right price.
The biggest part of the whole process they don’t show is the part where you find a house for really cheap. That part may actually be easier in this market. If you buy the house at a low enough price, you can put it on the market post-flip at a below-market price, hopefully reducing time to sale.
And, yes, you do have to budget for holding costs and closing costs, something they rarely talk about on the shows I’ve seen.
Looks like you’re in the wrong forum, I’ve reported it so it should get moved eventually. Unless you really mean to focus more on the “flip this house” type of TV shows?
In my not-at-all-expert opinion, I’d guess that the recent mortgage flap caused a downturn across all kinds of housing markets. If fewer people are buying houses (because they can’t get a mortgage they can afford), then houses are going to be on the market longer (or have to sell at lower prices). I’d say that the past few months were a bad time to try to sell a house at all, and the risk inherent in “flipping” makes things that much worse.
A big part of house flipping was a rising and crazy real estate market. When prices a rising quickly it is easier to make a profit and it is easier to sell quickly. Also it is sort of optimistic to think you can add $100K of value for $40K.
You must not have watched many of them to the end. A lot of the people make spectacularly stupid decisions and get creamed with carrying costs and out-of-control budgets. My favorite is Property Ladder, where the editors always manage to splice in the appropriate reaction shot of resident expert Kirsten Kemp raising her eyebrow, Spock-like, at some horrible idea.
My favorite one was with a trio of young guys who were obsessed with the numbers two and eight, and who constantly bickered about who should do the most mundane tasks. They spent something like three months on what was supposed to be a three week flip. At the end of the show they still hadn’t gotten an offer, and they had no intention of lowering their absurd asking price.
Still, an equal number of people with good heads on their shoulders manage to stay mostly within their budget, focus on the most valuable upgrades and get things done in a timely manner, and make an excellent profit.
All that said, with the real-estate market rapidly deflating in a lot of areas, it doesn’t seem like a good investment strategy at the moment. Flipping requires being able to sell relatively quickly at a good price, or you end up wasting money paying interest on the mortgage. Buyers are scarce right now and becoming scarcer in almost every market except New York. (But New Yorkers are all crazy people, so don’t pay attention to them.)
I had sold my house in Chicago last November; it was a 100+ year old Victorian which a previous owner had “improved” with vinyl siding, suspended ceilings with fluorescent lights, and medium (at best) quality wood paneling. I sold it as a fixer-upper “as is” within two months of putting it on the market. The realty agent was pretty sure that the buyer was intending to flip it to order, especially since he had brought another person with him on a second walk-through. I was talking to my sister the other day, and she told me that she’d heard there had been seven dumpster loads of stuff cleared out; since I had left the place completely empty I can only assume that the interior had been gutted. She then added that she’d also heard that the prospective re-buyer had changed his mind, and that the buyer was now living in the house while trying to find another buyer.
I think I was lucky to sell when I did; I suspect if I had waited until spring (as I had considered doing) I wouldn’t have gotten as much as I did for it. I’m wondering now what I’m going to find when I start house-hunting here next year.
That’s a big part of it. You need to make improvements that are going to benefit the house without taking too much time, spending too much, or, over-improving the property. I’d have an inspector check the house too to make sure there aren’t underlying damages that will make a project a bust to begin with.
The most common way people think they can flip houses is via foreclosures. What they fail to realize is that there is a pool of sharks that’s been buying those houses for years, and if you manage to buy a house at auction instead of them, there’s probably a very good reason that you’re missing.
One of the biggies is this: Say a house is coming up at auction, with the starting bid at 125K, which is the amount remaining on the trust deed that is in default. The house is worth 200K. You bid and buy it for 140K. Bargain, right? Except there was a second mortgage on the property that wasn’t in default, and you’re now on the hook for the 45K 2nd. They also haven’t paid their property taxes (3K) or the contractor that mostly repaired the septic system (8K). You now owe 196K on your 200K house, and the septic system still needs work. Oops.
The house next door to a friend of mine was used in one of these shows. I can tell you that the people in the area hate the concept.
An addition was built on and ruined the scale of the house on the lot.
The refurbished house was put on the market at a higher price than is common in the area (I know that is the idea of flipping) but it pisses off the neighbours when it drives up their property taxes.
I did see one of these shows where the buyer ripped open the walls of the house-and found serious rot/termite damage everywhere. There were also nice items like galvanized pipe plumbing (allneeding replacement), and an ancient electrical system. I guess any house older than 40 or so years is liable to have major problems, that aren’t always forseeable. And what happens if you “over build”-that is, put too much in for the neighborhood? All in all a riskey business
Some of it would probably have been foreseeable if they had a competent inspection done before closing on the property.
Indeed. Many people have priced themselves out of the market by building too fancy for the neighborhood. Few people want to live in a jewel-encrusted mansion surrounded by plywood shacks.
Adam, where do you live? That would not raise the neighbors property taxes in California.
Property taxes in most places are based on the value of the home; the “value” of a home is in turn based on the recent sale prices of similar homes in the neighborhood. A 3BR place with all the trimmings will sell for more than a vanilla 3BR, but all of the owners of the vanilla 3BRs will still get hit with property assessments based on the sale price of the ritzy 3BR. How do they do property tax in California?
1.25% of the purchase price of the property annually.
Thanks to Prop 13, our taxes only can go up by a set amount per year, and houses aren’t reassessed unless you do major revisions to them. The people we bought our house from were paying under $1,000 a year (for a house worth over $300K 11 years ago) and ours have hardly gone up in this time, though the prices has doubled. People moving in get hit with higher rates.
When we lived in NJ everyone got reassessed every few years.
As for the OP, two houses got flipped near us. They got gutted and redone in a style not matching the houses around them, and made bigger. And they both sat on the market for over six months. There was also an article in the local paper about a clown who tried flipping all over the Western US, and lost his shirt.
Around us I think the idea was for the renovation to put the house in the $1 million range, with high margins. I think it stopped working.
Thus resulting in neighbors with houses of similar value paying wildly different amounts of property tax. And old people staying put, since downsizing to a house half as big might cause a big increase in property tax.
The big downsides, which are itemized on maybe one out of ten flip shows, are that you can customize the house far beyond the neighborhood maximums and those who can afford the house would never live in the neighborhood.
And the other is that the sales commissions, mortgage costs, bridge loans and inspections, taxes and fees are far more than the flip profit, resulting in a net lioss.
Those programmes usually depict novice “flippers” who are endeavouring on such an investment for the first time and are possibly ignorant of hidden costs, time delays, things going wrong, the wider market etc.
There is no downside, if you have a surefire way of convincing some sucker to pay you $100k for $40k worth of work, you SHOULD be filthy rich. That’s the free market.
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