Here’s What It Takes to Be a Home Flipper
Maybe it’s the effect of watching too many home renovation shows on HGTV, but home flipping is making a comeback in a big way.
Flipping homes by buying low, fixing them up and selling high is at its highest level since 2006, according to a March 2018 report by ATTOM Data Solutions. The 207,088 U.S. single-family homes and condos that were flipped in 2017 marked the highest flipping level since 2006, and accounted f
or almost 6 percent of sales.
Before the housing crash of 2008, flippers would buy a home at full price and rely on quick home price appreciation before cashing out. Now, they may be more likely to buy low and sell high as confidence in the housing market grows.
House flipping is a business that newcomers can do — or at least think they can — by having enough cash or the financing to buy a foreclosed or undervalued home and repair it to sell at a higher price. Money can be made, but there are some things to know before jumping in.
It’s not what you see on TV
Like most TV shows, what you see on “Flip or Flop” or other shows on HGTV or elsewhere don’t show you the whole story.
“TV certainly makes things look a lot easier,” says Danielle Hayduk, who has flipped about 30 homes in the Cleveland area since making it her full-time job in 2013.
Unless you’re doing the work yourself, which can eat up a lot of your time, you’ll need to hire contractors to do the renovations. In Hayduk’s experience, that has turned a typical eight-week flip to 14 weeks.
Rae Dolan, a real estate investor who flips home for her company AMI House Buyers in Katy, Texas, with her husband, agrees that it’s not as easy as it might look on TV.
“Rarely does what you see on television shows focused on real estate investing mirror real life,” Dolan says. “If your primary interest in flipping homes is because it l
ooks fun on TV, you’re going to be disappointed.”
If you don’t have enough cash to buy a home outright, you’ll need some form of financing and will to talk to mortgage lenders. Hard money loans can require 35 percent or more down.
Don’t fall for “coaching” programs that cost $20,000 or more that proclaim you don’t need any of your own money to be a real estate investor, says Aaron Norris, a real estate investor and hard money lender in California and Florida at The Norris Group.
“Having cash will always be king,” says Norris, who recommends assuming 20 percent down.
There are numerous buy
ing strategies. “A decade ago, many of our hard money loans were coming from trustee sale, foreclosure and short sales,” he says.
“Now, very few deals are coming via distressed inventory and instead are coming via equity sellers, new construction, and adding square footage,” Norris says. “These are all very different business strategies. While it’s tempting to try all at once, chances are you’ll suck at all of them unless you focus and get really good at a few."
Even with a home loan or “fix and flip” financing that can include loans for the purchase price and renovations, you’ll “still need to have a healthy amount of cash
set aside for the unexpected, Dolan says. Such as bees.
She bought a house in February and a few days into renovations noticed there were a lot of bees in the home. Hives were found in the dining room wall and attic.
“To get rid of the bees, we had to bring in a pest control company, take off a portion of the roof
, repair it, and then remove two trees we felt were creating the conditions for them to be there in the first place,” Dolan says. “It was a $2,600 hiccup that wasn’t part of the original renovation budget.
“We’ll make it back on the sale of the home, but that unexpected expense had to be paid the day the work was completed.”
Be a people person
Being comfortable with negotiating is important, Dolan says, because it’s done with people with competing interests.
“The buyer market controls the after-rehab value, and the labor market determines the costs associated with rehab,” she says. “The only aspect you can control is what price you purchase a house for, and at what terms you’re borrowing money for the flip. You need to be willing to negotiate hard on your behalf for each.”
House flippers shouldn’t be afraid of confrontation, Dolan says. “If a contractor or subcontractor did shoddy work in your flip, you’re going to have to confront them with the issue and insist they fix it,” she says.
Networking is also vital, she says. It can help you find potential homes to purchase and subcontractors who are affordable and do great work.
Hayduk recommends getting a good mentor in the home flipping business who will show you how to flip homes and will let you do a project with them.
Comfortable with risk
Risk is part of the job of flipping homes. “In my opinion, there is no such thing as a ‘sure thing’ in real estate investing,” Dolan says.
As a resident of the Houston area, Dolan saw many house flippers in various phases of flips when Hurricane Harvey hit. More than 200,000 Houston-area homes flooded, and almost three-quarters of them weren’t in a 100-year floodplain and therefore didn’t carry flood insurance, she says.
Seeing the home you’re trying to flip destroyed by a flood or other disaster can be a risk you may not want to take.
Focus like a Realtor
Like a good real estate agent, it can pay as a flipper to know an area inside and out. Dolan recommends focusing on one area where you want to flip houses, called a farm area, and learn everything you can about the real estate market within it.
“I wouldn’t know much about a market outside my farm area, but inside my farm area I know the potential value of a house and the rehab costs I’ll incur to obtain that value like the back of my hand,” Dolan says.
She’ll know the average days on market, the schools and the value drop lines — the price of two homes two blocks away that can have significantly different values based on school boundaries or changing subdivisions, for example.
If the “HGTV Effect” has you thinking buying and flipping homes is easy, the skill of focusing on a geographic area can help make doing the enormous amount of research required easier.
“Finding properties that are good candidates for a fix and flip is very challenging and requires a lot of research,” says Kevin Deselms, a real estate agent at RE/MAX Alliance in Golden, Colo. “Many times, an inexperienced buyer will purchase a property in a less than desirable area, where the surrounding homes are older and not updated.
“When they spend a bunch of money turning that home into the best one in the neighborhood, they soon discover that the surrounding property values have a serious negative impact on their return investment because people simply won’t offer more than what the nearby comparable properties support, such as price.”
“Watching television shows about fixing and flipping properties should not be considered an education about the process,” Deselms says. “It’s a challenging endeavor that can yield big rewards, but it can also end up costing inexperienced people a lot of money.”
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