“Guess what Mom!? I’m going to make a ton of money flipping houses!!”
Warning: I may step on some toes. (and you’ll have to put up with a bunch of emojis) But hear me out!
When I run into someone who has been to one of those get-rich-quick home flipping seminars and is going to “crush it” by flipping houses, I just get sad. 😢 I recently met someone who spent $7,000 on a home-flipping website, over and above the $8,000 they spent on the program. (What in the world do you need a website for??) Sometimes I move from sad to angry when I hear those stories, because I know someone just got ripped off. 😠 That’s what prompted me to write this post.
Chris and I went to one of those home-flipping seminars last year. We were just curious. After 90 minutes of hard-selling, fast-talking, fist-pumping rhetoric, they had a 15 minute break… and we ran out of there like our hair was on fire! I’m not kidding!
Knowing our local Frederick market as Realtors®, we realized that almost everything they were saying about buying houses and flipping them was either over-simplified, or it was misleading… and some of it was patently false! The only people making money that day were the seminar people. They sell their “proven system” and “proprietary software” and their ongoing coaching, for a pretty penny!
And no worries…if you can’t get financing, they’ll lend you money at a 30% rate! They spent a good chunk of time trying to convince everyone that the interest rate doesn’t matter as long as you’re making all that money! 🤯 We used to call that USURY!
Caveat: Fixing and Flipping is Legitimate
Don’t get me wrong, there are legitimate ways to invest in real estate by purchasing a home in need of “fixing and flipping”. It’s even a necessary part of the housing industry, in my opinion. Between 2008 and 2013 there was a lot of distressed housing around the country that needed to be bought, renovated and sold. In large part, investors did that work and helped the economy and the housing market.
What most inexperienced people know about home flipping is only what they see on television. Unfortunately, the home-flipping TV shows don’t really show the reality of the business. Yet, we’re seeing a regular line-up of seminars from the real estate gurus teaching their own special systems for easy, no fuss, get-rich-quick house-flipping programs. Your mother probably told you if it sounds too good to be true, it probably is. 🤨 Everyone should listen to their mother on this one.
Flipping houses is hard work, and people don’t get rich from it. It’s usually something they do alongside a career or business. Sometimes house flippers do very well and move on to something more, like developing, or residential or commercial real estate. Sometimes they lose their a$$. It’s something that you need to learn a lot about before you dive in.
Flipping Homes Can Be High Risk
Home-flipping is a high risk business, especially for someone new to it. To have a successful flip, the stars must align:
- The home has to be priced low enough for the investor to make a profit.
- The amount of work that needs to be done can’t be so much that there is no profit.
- The investor has to have a team of professionals with the skills to get the job done. But they can’t spend all their profits on that team. There has to be enough margin in the entire project. As it is, margins are already slim in house flipping.
- There has to be a demand for the home when it is renovated. If you over improve, you risk not being able to sell the house for what you have into it, then you’ve lost money. If you under improve, you risk the house not selling.
Sad Story of Flipping Gone Wrong
We went to a broker’s open last month for one of the agents in our company. (A broker’s open is a collaborative event where real estate agents come to another agent’s listing and give their advice on the price and marketing of the home.) Unfortunately, the home was a flip that didn’t go very well. The flipper spent entirely too much on the home renovations, and although it was well appointed for the neighborhood, there were some trouble spots. The lot was next to the interstate and the noise was a real problem. The highest sale of comparative homes in the neighborhood was $440,000 to date. He needed $500,000 just to break even. Predictably, he was holding out for his price, but the longer the house sits on the market (not selling) the more carrying costs add up. He needed to stop the bleeding. 🤕
This happens more often than you’d realize. And this was an experienced flipper. The problem was he didn’t know the local market. If he had, he wouldn’t have bought the house. He ended up overpaying because he was in a bidding war. He thought he could sell it for a higher price, because he didn’t do the due diligence to understand the local market.
Here’s a #TrueStory from a Facebook Real Estate Group:
Flipping Homes Can Be High Cost
Many experienced flippers buy a fixer-upper and have great intentions, only to get into the home and find surprises.
A cracked foundation, rotten sub-floors from long-time leaks, mold, termite damage, electrical problems, and the list goes on. Many times these surprises cost money to fix that they didn’t plan in their budgets. Bye-bye profits. 💸
We have a friend who is more than 12 months overdue on a flip because he ran out of money due to unforeseen problems. He’s working on each item as he gets the money, but meanwhile, the carrying costs are eating away at his funds and his peace of mind.
Flipping Homes is NOT a Passive Endeavor
That’s probably the most misleading promise you’ll ever hear in these flipping seminars. It’s anything but easy. A flipper must be involved every step of the way. You must research the market and know what homes are selling for. You must locate the right home to flip, for the right price so that you can make a profit. In a successful flip, you must understand the scope of work the home needs and budget for it. You must find the contractors and take bids. If you’re financing the flip, this all has to be done before you can even get the loan and buy the house. And you have to calculate in the holding and carrying costs. In essence, you are the project manager. 👷♀️
Even if you aren’t doing the physical labor yourself, it is imperative that you have an understanding of construction. You also need to know about local laws and regulations, as well as about taxes and the process of selling the home. You are not only the project manager, you are the real estate guru. Additionally, successful flippers know what buyers want and what real estate trends are in that given location.
The big risks in flipping are
1. determining the present and potential value,
2. correctly planning the renovation costs, and
3. having the right team of professionals to help.
Flipping Homes Successfully takes a Team
One of the risks in flipping is getting in business with the wrong partner. You never really know how a contractor is going to work out until you use them. There’s nothing more frustrating than getting a project started and finding the contractors are lacking in the skills and knowledge that you need. There’s nothing worse than seeing a home where a contractor made a mess of something and just walked away. Bye-bye profits. 💸
I know I’ve painted a picture of doom and gloom. But, as I said, flipping is an important part of the housing industry. I’m all for it. I just hate to see good-hearted people being ripped off with promises that just aren’t realistic.
That being said, people have been successful flippers for decades. There’s almost something noble about it…taking a run-down asset and making it pretty and livable again. Providing a place for someone to call home. 😊
- If house flipping is going to be your new gig, be sure to read this article by fellow eXp Realty agent John Cunningham: How to Build Your Own House Flipping Team. John’s top tips: 1. Consult the Better Business Bureau, 2. Make sure the contractor is a prompt communicator, and 3. Make sure the contractor is licensed and insured. “The team that you put together is everything. Build the right team and enjoy success. Build the wrong team and you will not be able to get out of the flipping business fast enough.” And of course, consult a local real estate agent for advice on the local market.
Success at Flipping Homes Depends on the Local Market
Every home is different and every market is different. That’s why it is laughable that these seminar people show up promising their “proven system” will work like magic. What works in Las Vegas does not work in Frederick Maryland!
Remember how often we’ve said that All Real Estate is Local? The same is true for flipping.
Here’s what they don’t tell you: When the inventory is tight like it is in 2018 in many areas across the country, finding a home that makes a perfect flip is really hard. Investors are in competition with everyone else. If someone has a home that needs work, if they’re paying attention, they know the market is tight and inventory is low. They are probably going to list it on their local MLS with a Realtor® so they can get the most for their home.
Flippers will often find themselves in competition with a buyer looking for a personal residence. Most often that buyer will be willing to pay more than the investor. They’re not considering margins like the investor is. They don’t need to consider making a profit at resale.
Incidentally, you can all the “proprietary software” available, but if the inventory of homes in need of fixing isn’t there, it’s just not there.
What I Want to Say Most About House Flipping Seminars…
Although flipping is difficult, but I didn’t say it was impossible. It certainly isn’t a “get-rich-quick” scheme. It’s hard work and it takes a lot of knowledge about a lot of things. It’s actually better if you’ve already been an investor for a few years and you know the ins and outs of what people are looking for. It also helps if you have construction experience…even if, at least to mitigate against over-improving, or at worst, to keep from getting ripped off.
If you want to make money flipping houses, do your research and go in with your eyes wide open. And DON’T 😨 waste your money on some get-rich-quick house flipping seminar!
Have You Been Approached by A “We Buy Houses” Company?
You’ve probably seen the signs as you drive around town, “We buy houses…” in hand-scrawled print. Don’t buy into it! Please do yourself a favor and consult a local real estate professional about your home value first. Not all investors are bad people, of course, but some people are. Protect yourself from the bad ones who want to take advantage and help themselves to your equity. You may have equity, you may not, but you deserve to know what is at stake.
Greater Metrowest Massachusetts real estate pro Bill Gassett has written an informative article: Pros and Cons of We Buy Houses Flipping Companies, which pulls back the curtain on the house-flipping scammers we’re seeing. As Bill points out, speak to a local Realtor® before you consider one of those “We Buy Houses” companies. And be cautious when you are considering purchasing a flipped house!
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