It sounds like a good idea. Find a house that needs updating, fix it up and sell it for lots of money. You see programs about it all the time on TV. They make it look easy and profitable out there in La La Land. It looks like fun, too, especially to people who like to decorate.
You think, “I’d like to do that. Maybe I could make enough money to quit my regular job and do that instead.”
Think again. Having done this a number of times in the corporate world of frequent moves, it’s much harder than it looks. We only managed not to lose our shirts and it was VERY hard work, too. There are several reasons why this is pretty risky.
1. The first problem flippers face is the struggle to find a property that’s available sufficiently below market value to justify the money you spend fixing it up. Most houses that are true bargains in good neighborhoods never hit the open market. Real bargains go to real estate insiders who constantly study the market and beat you to the best properties in the best neighborhoods that attract potential buyers who are circling like vultures to get the perfect address. Those types of buyers tend to be people with either big money or big borrowing power. Pitifully few potential buyers fit into that category.
2. The second difficulty involves the costs of financing the purchase. No mortgage on a decent house is cheap. While you are sweating the payments, the lender is making out like a bandit. In addition, the recent subprime implosion has caused lenders to shy (if not run) away from investment property, particularly for higher LTVs. This means you get less leverage since you need to put down much more money to qualify for a mortgage.
3. The repairs and redecorating always cost more than you expect. If you can’t do most of the work yourself it can get really expensive. It’s also best to have electrical work and plumbing done by licensed trades to insure you can pass an inspection when you are ready to sell. For example your new whirlpool tub may require a larger hot water heater, or the extra kitchen appliances and electronics force you to buy all new wiring and breaker boxes. That work costs big money. The whole process also typically takes longer than you expect, and in this case time REALLY is MONEY! Banker bandits are taking your profits.
4. Suppose you are a great decorator. Ask yourself one question. Do you know what a load-bearing wall is or what building code requires for any building project? There is a LOT to know. Not doing something important CAN cost you money. Then there is always the risk that the house has some serious defect or problem that will cost thousands to fix and not show at all…like HVAC, or termites, or a failing foundation.
5. Then when you FINALLY get your flipper ready to sell, how long will it take to find a buyer to take it off your hands? Does your decorating appeal to buyers? Is the house cute enough on the outside to draw in potential buyers? We know of 2 homes that were purchased and remodeled to flip. One has been for sale 6 months and the other for over 2 YEARS. Neither has received a single offer! (Banker Bandits are rejoicing while the flippers are crying!) Oh, and most lenders want the property to have been owned for at least a year or they won’t do a mortgage for prospective buyers.
6. If you get lucky and get a good offer quickly you may have appraisal problems when your buyer tries to get a loan. Why? The lender is likely to know the property sold recently for X. You can count on them asking, “If this property was worth X just a couple of months ago, why is it worth Y now?” Now you have a new banker bandit to contend with. If your buyer wants to get 100% financing (and many do), you could really have a problem.
7. What if you have over improved the property for the neighborhood? Many affordable properties are affordable because of their location. We know one flipper who has a property that has not sold for nearly a year. He bought a house in a marginal neighborhood, spent a lot of money on it and has been forced to drop his asking price drastically. The house still has not sold. At his current asking price he WILL LOSE MONEY…and that’s not counting financing costs, either. He’s bleeding money every day for putting perfume on a pig. A good smelling pig is still a pig and a good house in a bad neighborhood is still worth about what the neighboring houses are worth, regardless of how much work you have done.
There are other issues with flipping houses. Many parts of the country have completely missed out on the housing price bonanza California has seen. The same house that would sell for several hundred thousand dollars in La La Land, would bring $80,000 to $160,000 in many locations. The possibility for financial gain just isn’t there, granite countertops or not. It’s the perfume on a pig thing again. In many housing markets there is virtually NO possibility you can spend money doing any more than 6 or 7 thousand dollars worth of work on a whole house and then get it all back in a quick sell. That pretty much makes new kitchens and baths financially impossible. You’re strictly limited to cleaning, painting and staging.
Market facts determine the outcome more than any décor or fix up. Make sure you don’t risk your financial future on an impossible dream.
Paula works with her husband, Ron in his mortgage business. His website is full of Free information about the mortgage process. Check it out at
Alabama Mortgages
