What You Should Know Before Dipping into Home Flipping
The TV shows make it look so easy. You buy an ugly house, fix it up in a week or two and then sell it for a whopping $100,000 profit.
But as anyone who has ever tried it knows, house flipping is a lot harder than it looks.
“The math never lies,” says Brandon Turner, senior editor and community manager for BiggerPockets, a website for real estate investors, and a veteran flipper near Olympia, Wash.
And often, the math doesn’t add up to a sizable payday when you factor in the time, effort, labor and money to execute a flip. But that doesn’t keep people from trying.
Investors flipped 156,862 single-family homes in 2013, according to RealtyTrac, which defined a flipped home as one bought and sold twice within six months. The number of flips was up 16 percent from 2012 and 114 percent from 2011. The average gross profit for a completed flip – or more accurately, the difference between the first sales price and the second sales price — was $58,081.
Only 21 percent of those flips were foreclosure properties, according to RealtyTrac, down from 32 percent in 2011. And it has proved much more popular in some cities than others. Home flipping was up 141 percent in Virginia Beach, Va., 92 percent in Jacksonville, Fla., 88 percent in Baltimore and 79 percent in Atlanta. But it fell 43 percent in Philadelphia, 32 percent in Phoenix, 17 percent in Tampa, Fla., and Houston, and 15 percent in Denver. In 2013, there was a bigger increase in the flipping of properties that sold for $400,000 or more than in lower-priced properties.
“Investors have not lost interest in purchasing and flipping homes. In fact, now that we are seeing home price appreciation, they are more interested than ever,” Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty, which covers Oklahoma City and Tulsa, Okla., said in a RealtyTrac news release. “The challenge for many would-be flippers in our markets is a shortage of available inventory to flip.”
Flippers face four key challenges:
- Finding a good house at a low enough price to make the deal work
- Finding reliable contractors to do quality work at a reasonable price
- Finding money to finance the deal
- Selling the home at a price that will cover expenses and provide enough profit to compensate for the time invested
If location, location, location is the mantra for all real estate, “do the math, do the math, do the math” should be the mantra for would-be flippers.
And we mean all the math.
For example, if you calculate a potential flip this way: Buy a house for $100,000, spend $20,000 on improvements, sell it for $150,000 and earn $30,000 profit, you clearly haven’t done all the math that’s needed.
What about the cost of borrowed money and the cost of selling the house? What if the contractor discovers, once he starts the work, that half the plumbing lines are rotted? What about the cost of insurance, utilities and property taxes while you own the house?
You must dig below the surface-level figures to paint a complete and accurate picture of the flipping opportunity. Only then can you determine whether it’s a sound financial move for you.