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The Not-So-Glamorous
World of House Flipping
Featured
Article
October 8, 2006 - Southport,
North
Carolina
(NC) - House flipping seems to be the new American Dream. TV
programs on the subject abound, showing you how to improve and sell
a house (yours or someone else's) or transform one of the ugliest
properties you've ever seen into a fabulous,
who-wouldn't-want-to-live-there dream home. Your bookstore's real
estate section is bursting with how-to titles that make house
flipping look as easy as pie. Even more intriguing are the
friend-of-a-friend stories you hear: your neighbor says his uncle
bought two homes and a new boat with the profits he's made from
flipping just a couple properties. Sounds great . . . but is it
really that simple?
Absolutely not, say Scott
Frank and Andy Heller, co-authors of the new book Buy Even Lower:
The Regular People's Guide to Real Estate Riches (Kaplan
Publishing, 2006, ISBN: 1-4195-3574-9, $18.95). The reality TV view
of house flipping—that you magically find the right property, buy
it, fix it up, sell it effortlessly, and enjoy a hefty profit—is
misleading at best. It conveniently leaves out the time, the risk,
the stress, the headaches . . . and the failures.
"It may look easy, fun, and
exciting on TV," says Frank. "But remember, TV is entertainment. The
real world can be anything but. I've found that most of the time
people who jump into flipping real estate based on TV shows and/or
hearsay from friends never fully know what they are getting
themselves into."
"Most people want to get into
house flipping to make a quick buck," adds Heller. "It usually
doesn't take them long to find out that while that is possible in
real estate, fast profits are the exception rather than the rule.
And success rarely comes easy!"
To help new investors, Frank
and Heller have put together five reasons why buying and flipping
property isn't usually the cakewalk portrayed on TV.
Flipping can be extremely
time consuming. When they first decide to try their hand at
house flipping, many people think they will be willing to put in
whatever time and effort is necessary to make their dreams come
true. Or they think because real estate investing is going to be a
hobby, they will simply dip into their hobby-time bucket to do it.
Unfortunately, both expectations can be unrealistic. Many people
aren't prepared for the large amounts of time that go into house
flipping, particularly during the buying phase. To profit, you will
need to purchase at a deep discount (often 25 percent or more).
Because the pool of properties with this type of discount is usually
small, you'll usually have to work extra hard and invest significant
time to find them.
"Many first-time investors who
choose the 'Buy and Flip' investment strategy don't expect to spend
much time finding the property," says Frank. "All those fix 'em up
TV shows make it look like the properties are abundant, and that
most of your time is spent repairing the property and getting it
ready to sell. That's actually backward. In reality, if you want to
profit from your investment, you will search and search for a
property that you can purchase at the right discount. Then you will
actually make the repairs relatively quickly to get the home back
out on the market."
Costs can get out of hand.
Big discounted properties are discounted this way for a reason. Most
of the time, it is because they will require significant repairs
before they'll sell for a profit. What's more, many misguided,
first-time investors come in looking to make the dramatic changes
they see investors making on reality TV—unaware that their goal
should be to make the property comparable to surrounding properties,
not better than them.
"There is a difference between
remodeling a property and making necessary repairs," says Heller.
"When you calculate your repair and improvement costs, they should
be based on putting the property in comparable condition to those
surrounding it. Often the houses you see flipped on TV go through
dramatic changes: new kitchens, changes to the exterior, extravagant
additions, and so forth. Those investors are often spending big
money on changes that aren't necessary in real life but make for
good TV. These extra repair and improvement costs can take a big
bite out of your profits. Focus on the necessary changes. Repair
broken windows and fix a leaky roof, but don't put in a new swimming
pool simply because it will make the house more valuable. Think,
'Will the repair or improvement make the house more profitable?'"
House flipping is a
stress-filled business. Because profits are actually realized
after the sale of the property, every day that goes by—and that the
property goes unsold—eats into your profits. You'll want to sell the
property as quickly as possible, which at times can cause many
headaches. In their book, Frank and Heller lay out three common
areas of stress:
1. Unless you use a real
estate agent (which will cut into your profits), you'll probably
deal with many people interested in buying the property.
2. Every day the house goes
unsold the holding costs increase (utilities, mortgage payments,
advertising costs, etc.) and continue to eat into your profits.
3. Deciding if and when to
reduce the sales price or include a real estate agent (and lose a
portion of the profit to the agent's commission) to help sell the
property.
All of this stress can be
overwhelming for first-time flippers. If you know what to expect,
you will be better prepared for real estate success.
You may end up with a
property that is hard to sell. Occasionally, you will buy a
property at a discount because it needs more than simple repairs. It
may even have problems that can't be repaired at all. Is it in a bad
neighborhood? Too close to a busy street? Was it built on a steep
hill? These factors will allow you to pay a discounted amount for
the property, but they may make it difficult for you to sell when
the time comes.
"You don't want to end up with
a property that is too difficult to sell at a profit," says Heller.
"You need to make sure that you understand the issues and get enough
of a discount when you buy, so that you can address the problems and
still profit when you sell. If that just isn't the case, it may be
in your best interests to move on to the next property."
Unexpected costs could ruin
your profits. To ensure there are no surprises when the property
becomes yours, make an appointment with an inspector while the
contract is being finalized. The inspection report will spell out
problems with the property that you're already aware of, but
occasionally it will inform you about a new problem. This process
helps ensure that you identify and assess all problems, understand
repair costs, and line up workers to make the repairs. Most
importantly, it provides an opportunity to reopen negotiations and
ask for additional discounts to cover unexpected repairs. When you
bring these problems to the seller's attention, they may choose not
to fix them, further discount the property, or compensate you in
another way. In this case, unless there is still room under your
maximum purchase price (the most an investor should pay for a
property to obtain the appropriate profit) to cover these extra
costs, you may have to walk away from the property.
Still want to give house
flipping a try? That's fine. Just make sure you know what to expect.
Reading Buy Even Lower is a great start. Frank and Heller lay
out their Six Golden Keys to building wealth through real estate.
They tell how to determine your minimum investor discount, know what
a good property looks like, find these good properties, calculate
your maximum purchase prices, make solid offers, and negotiate like
a chess master. All of these skills are vital to your success, and
no TV show will convey them in a more easy-to-understand way.
"I don't think anyone should
get into house flipping based simply on the glamorized picture
television portrays," says Frank. "That's almost a guaranteed recipe
for problems. Very costly problems. Educate yourself. Go through
each of our Golden Keys, so you know what elements to look for. Then
you too can be successful in real estate investing—in the real
world."
About the Authors:
Scott Frank is an
executive in a Fortune 100 company and has been buying, renting, and
selling residential real estate on a part-time basis for more than
twenty years. Scott is married with four children and resides in
Atlanta, Georgia. Andy Heller is an executive in an
international transportation firm and has been buying, renting, and
selling residential real estate on a part-time basis for more than
fifteen years. Andy is married with one child and resides in
Atlanta. Together, Scott and Andy have bought, rented, and sold
approximately one hundred properties valued at over $10 million. In
2003, they wrote the Fortune magazine-recommended book
entitled Buy Low, Rent Smart, Sell High.
About the Book:
Buy Even Lower: The Regular
People's Guide to Real Estate Riches (Kaplan Publishing, 2006,
ISBN: 1-4195-3574-9, $18.95) is available at bookstores nationwide,
major online booksellers, and
www.RegularRiches.com.
For more information, please
visit
www.RegularRiches.com.
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