What You Should Know Before Dipping Into Home Flipping
Flipping houses has become all the rage on cable television these days. Buyers find a house “with potential,” bring in honest, low-wage contractors to remodel the interior and landscape the exterior. In a matter of days, the house is a testament to modern design; the diamond in the rough now brilliantly sparkling for eager buyers to see. In short order, buyers pay well over market value for the house, and the investors walk away with a huge profit.
If only it were so easy.
Veteran flippers will tell you that sizable, recurring paydays are the exception rather than the rule once you do the math on the all the costs involved in flipping a house. Such costs include closing costs, property taxes, skilled labor to remodel and landscape, as well as the time and effort of the investors.
Even so, flipping houses is a gamble people many seem willing to take.
Location clearly matters. In 2012, foreclosure properties were less likely to be flipped — accounting for one-fifth of flipped homes — but became more popular in homes with a second sales price of $400,000. The rate of home flipping grew in Virginia Beach, Jacksonville, Baltimore, and Atlanta, while dropping significantly in other large cities.
In 2013, nearly 160,000 single family homes were bought and sold multiple times within a six month span. This is RealtyTrac’s definition of a flip. This number is more than double what is was two years prior, and up nearly twenty percent over 2011. The difference in sales prices between purchases — the gross profit — was about $60,000.
While these numbers sound good, gross profit ignores the number of direct, out-of-pocket expenses involved in flipping a house. It pays to do the math.
Of that $60,000 profit, investors have to pay for the cost of a loan; initiating a loan has several costs. Interest on the loans, while technically deductible, is a cost that can’t be recouped. If a buyer has to wait six months to sell a house, he is responsible for half a year’s property taxes. There are also closing costs, which can average as much as $3,000 in some parts of the country. Then there’s the cost of the raw materials and labor needed for extensive remodeling.
Even though the pace of real estate appreciation has grown as of late, flippers face a number of other challenges. Perhaps the greatest challenge is finding homes that meet investor criteria to be considered worth flipping. Unexpected costs, like faulty wiring, can set a project back days, or even weeks, and cost thousands.
In sum, flipping a house requires investors to wear a number of different hats. To be successful requires a thorough understanding of home construction, zoning laws, and an appreciation of the costs inherent in flipping a home. Flippers must also have the knowledge of a real-estate agent at their disposal to best determine market value and demand for a given home. And, if the Great Recession of 2008 taught investors nothing else, homeownership is still a gamble.