Flipping is a Hot Trend, But it Can Get You Burned
It’s more than just paint and carpet replacement
House-flipping shows have been the rave during the past few years. HGTV alone has at least 10 such shows, including the whole “Flip or Flop” franchise (set in Law Vegas, Fort Worth, Atlanta and Nashville), “Flipping Virgins,” “Desert Flippers,” “Vintage Flip,” “Texas Flip and Move”and “Good Bones.”
In the majority of these renovation episodes, the flippers end up selling the houses they have renovated for a hefty profit. But how realistic are the scenarios in the HGTV offerings?
Flipping is not an easy paint-and-sell proposition. There’s much research that goes into finding and buying a house in the right neighborhood at the right time for the right price. And, as viewers know, sometimes what appears to be a dream flipping prospect on the surface can quickly turn into a nightmare of black mold, knob-and-tube electrical, not-up-to-code plumbing and leaky roofs.
In a special contribution to USA Today, Tanisha A. Sykes examines the highs and lows of turning a run-down dwelling into a showplace. She also gets experts to expound on what novice flippers should be aware of.
Flipper Jerryll Noorden warns people just entering the flip profession that getting loans for the intended flip house is not easy. Traditional banks often shy away from making a home loan for flippers, and interest rates are higher than they would be for a home in which the loan recipient plans to live.
Here are a few things to consider if you’re looking to become a flipping magnate.
While you could go through traditional real estate agencies or pore over the Multiple Listing Services, experts say you are unlikely to find an affordable home to flip, so they urge you study the market outside the usual venues.
Nathaniel Butler, a marketing manager at Washington Capital Partners in Virginia, told USA Todaythat flippers often turn to off-market dealer platforms, contractors who work on flips or just by drive through neighborhoods looking for distressed houses.
Finding the right house for a flip is no easy task. One flipper advised looking for houses with peeling paint, cracked windows and overgrown grass, which likely are selling below market value.
Timing is another consideration, said one real estate broker. The best time to find a good flip project is during the holidays, at the end of the year and during the summer.
Then there’s the right price question. Many buyers use what is called the 70% rule, according to Stefano Grottoli of Orange Sun Investments in New Jersey. He told USA Today that if a buyer is hoping to sell a finished flip for $200,000 and remodeling costs $50,000, the purchase price should be no more than $90,000. And that’s the top price – start negotiations much lower with the hope of saving even more money.
Another broker warned of improving a house too much. If the neighborhood doesn’t match the high-end designs a flipper has for a home, it is not going to attract high-end buyers.
In an article for Money Crashers, author Heather Levin took a look at the popularity – and pitfalls – of the flipping industry.
According to RealtyTrac, Levin reported, 12% of flipped homes sold for break-even or at a loss after renovation costs, closing costs and commission. In 28% of the flips, the gross profit was less than 20% of the purchase price.
Levin said those who want to enter the industry should take the following steps:
- Check your credit report. If it’s good, you’re likely to get funding for the flip. If not, start repairing your score to obtain less costly loans.
- Research the safety of neighborhoods. If they are near a high-crime area, avoid them. She recommends using crime-mapping services such as Spot Crime and Crime Reports to get a gist of the neighborhood. Another tip is to check the National Sex Offender public website to find out if the house is near a registered sex offender.
- Look beyond the surface by examining plumbing, electrical and the roof to make sure a complete replacement is not necessary. If you aren’t well versed in what’s what, bring a knowledgeable friend or a contractor to assess the house.
That said, flipping houses in the right areas could bring in big bucks. Fortunemagazine listed cities in which flippers saw gross profits of 80% or more in 2016. Flint, Michigan was fourth on that list, with the average profits on investment being 105.8%.
Levin suggests flipper wannabes to research the industry first. Modest Money lists three books that can help first-time flippers understand the process: “The Book on Flipping Houses: How to Buy, Rehab, and Resell Residential Properties,”by J. Scott; “Fixing and Flipping Real Estate: Strategies for the Post-Boom Era,”by Marty Boardman; and “FLIP: How to Find, Fix, and Sell Houses for Profit,”by Rick Villani.