I recently read an article on a big time media website that sought to give potential real estate investors advice on whether they should flip a house.
The mindset was rudimentary, with a focus on broad questions: “How much money can I make doing a flip?”, “What do I target”, and of course, “Should I flip a house?” I didn’t agree with their advice and I’ll explain why.
Remember, it is particularly important when your audience is asking a question as basic as “should I flip a house?”, that your advice is grounded in reality. And this advice was suspiciously light in that area.
Because the subject property in the article was essentially a unicorn. Like the fabled animal in many a tale, it is no where to be found in reality, whatever the stories tell us.
In terms of their perspective, below is a step through of the salient points…note your own reaction to each, then read mine.
The Suggested Flipping Approach
- Purchase the least expensive home you can.
- Buy that cheapest home in the best neighborhood possible.
- Buy a home that is structurally sound. This includes things like a newer roof, newer windows, an HVAC system less than 10 years old, and modern electrical and plumbing systems.
- Buy a home that requires only the most cursory of improvements – all cosmetic. We’re talking cabinets, counters, some paint…that sort of thing.
- In keeping with that vein, the target should ideally not require permitting – to keep things moving along (and cosmetic improvements normally would align with this philosophy).
- Buy in areas with public transport nearby and good schools in close proximity.
- Your top price paid should provide at least a 25% discount relative to homes in the area that are in excellent shape, plus additional discounting for repair work.
- Hold the home for 2 months or less.
- Given a very short hold, make sure you hire a great contractor who will do all this work quickly, do it right, and keep costs down.
Some of this advice is useful, and I like its optimism. Truly. When you are starting off from the most basic of questions, (namely, How do I do this, should I flip a house?), a positive perspective is key. And the fact that it is a conservative approach in terms of target selection is a safer approach for sure.
Looking for professionals to assist you that are “professional” is always a good approach also. That however, is about where I part ways with this advice.
The details don’t add up.
Life does not provide deals like those described above – at least not to the majority of people, the majority of time. If you are smart enough, hungry enough, and lucky enough, then YES, I really bet you can make the points above work in your favor.
But what that will require is a constant flow of excellent flipping targets you are able to acquire before others. That will happen organically, over time, through relationship building and excellent marketing efforts.
You will have deep expertise and deep pockets. Or at least an excellent loan officer on speed dial who can vouch for your credibility as you maneuver the why and how of the house flip.
Let’s break down exactly why the advice this large media outfit is providing is problematic. We’ll walk through each of their house flip points in sequence.
Purchase the least expensive home you can
Nothing really wrong with this advice. It is always a good practice to pay the least possible for the best product – if we are talking a transactional business (commodities). Sometimes we are willing to pay more to maintain business relationships, for quality, or for speed.
But basically, agreed…good advice.
Buy in the best neighborhood possible
Agreed. We’re two for two. As property investors, we absolutely want high demand, so this is a good point in the abstract, but may be problematic in practice.
In fairness, we have not yet talked about profit margin…so let’s give our author the benefit of the doubt when he tells us to buy the cheapest home in the best neighborhood.
Per the author’s advice, the purchase price of our house flip target property is supposed to be relative to the average top-notch property in that desirable neighborhood. So really, it just has to be ANYTHING CHEAPER than the average. Even if it’s just one dollar less…that’s still cheaper.
Buy a home that is structurally sound
OK, sure, but here is where we start to see some real cracks in this approach. The advisor suggests things like a newer roof, newer windows, an HVAC system less than 10 years old, and modern electrical and plumbing systems should all be in your target property.
Sure, all those are great, but you want to buy the home at a discount right? Solid roofs, newer heating and cooling systems, new windows…these things cost money.
And on top of that, our target home is in a desirable neighborhood. Should I flip this house? Of course. The only issue I see is why is this home discounted? ( Psst…it’s a unicorn ).
Buy a home that requires only cosmetic improvements. Avoid Permits.
Now, we’ve arrived at two definitive NO’s. The writer is thinking about paint, new cabinets, a new kitchen counter, that sort of thing.
It’s not going to work that simply, and here is why. I readily admit, by the way, that I have (unfairly) lumped permitting in here too. I’m doing that simply because it is unrealistic to bypass permitting on any sort of a real flip. If you want to differentiate, permitting is almost always involved.
“Imagine you and I are both competing for a home. It’s a great looking classic bungalow in a nice neighborhood.”
Imagine you and I are both competing for a home. It’s a great looking classic bungalow in a nice neighborhood. It’s priced to move at the requisite 25% discount, and then some. I want to flip it, while you and your spouse want to raise your family in it.
It meets ALL the criteria we’ve laid out per the article’s advice. Great location, important updates (furnace, central air, roof, plumbing, electrics). It is near top schools and the local train station.
The bones of the home are excellent – no buckling foundation or dry rot here.
The bathrooms do have some cracked tile. The kitchen cabinets are old and dated. But the bones of the home are excellent – no buckling foundation or dry rot here.
The counters are Formica and the sink is a well used and rusted porcelain drop in, but the electrics and plumbing are good and solid. Key circuits have been updated in the last few years. The whole house does need paint…both inside and out.
I have good technical skills in construction from doing this since dinosaurs roamed the Earth. I also have a deep bench of tools and sub-contractor contacts.
The extent of your expertise is painting, landscaping, and some minor home repair when your landlord didn’t take care of things. You have no advanced tools or training because you’ve never needed them. And you have no contacts in the business.
Profit Now…or Later?
And now we come to the profit motive. I have to make a profit on the home, you don’t. Or rather, you’ll be there for years, so your profit will be a function of a long time frame while mine will be a function of a short time frame and short dollars.
In other words, I need to profit NOW. So, with all that said and done, who do you think will win the race?
If you answered, “YOU”, give yourself a pat on the back. That is the correct answer!
If you can do the work because it’s easy, you’ll do the work. You’ll also pay more for the home than I can because our motivators are different. And you won’t walk away from the property because there are no significant issues to address (the differentiator for my technical skills).
“I won’t get it, at least at a good price, and will have to walk away.”
The net result? A boost in demand for our ‘pre-flip’ property. I won’t get it, at least at a good price, and will have to walk away. It is not a realistic strategy for investing in short term property given the other realities the author paints.
Buy in areas with public transport nearby and good schools.
Sure, agreed. But understand those amenities are sought after, so you will need to pay your seller for them to beat out others who want them too.
Pay at least a 25% discount relative to top-notch homes plus additional discounting for repair work.
No. Given the other realities demanded by our writer. You’ve got a home in a desirable locale that is structurally sound and requires a pittance of improvements that anyone can do (cabinet install and paint, maybe some tile)….cosmetic.
You’ve got great schools. You can walk to the train station or pick up the bus and let someone else take care of your commute.
“You’ve got a home that offers A LOT and requires A LITTLE.”
So should you flip it? Sure, it has mass appeal. It offers a lot, requires a little, and will sell to value-oriented buyers…or flippers…or folks who don’t have loads of cash, but will scrape paint and do some tiling.
In other words, EVERYONE. Think you’ll get that property for a 25% discount PLUS the cost of any improvements you’ll make? You know the answer there…it’s called a bidding war.
Hold the home for 2 months or less
Yes. Less time is always better. Your bank account will thank you. Given you just need cosmetic work, this isn’t necessarily problematic.
“You don’t want to float a business on hope and hype.”
It would only be an issue if you couldn’t afford to hold it MUCH longer. If that were the case, you should reconsider whether it makes sense to buy yet.
You don’t want to float a business on hope and hype after all. The current data suggests investors ‘get this’. AttomData found that sub-primers are not the investing driver in flipping houses as they were a decade ago (which helped create an unsustainable bubble).
Many more investors now appear to use more sophisticated borrowing strategies which in turn suggests they can float their operations in a more competent, sustainable way.. Read some insights from back in 2017 here on AttomData.
Hire a great contractor who will work quickly, correctly, and cheaply
Nope.
This premise is also a UNICORN, and dangerous advice to your pocketbook. You are now relying on someone other than yourself to do the work.
Sure, some of the jobs may require expertise that you don’t have. But all of them? Remember, the project is supposedly ALL cosmetic in the author’s article.
Roll up those sleeves
Why the heck aren’t you rolling up those sleeves?
The only saving grace here is if indeed it is nothing more than skin-deep work, you can pick up the slack when your contractor doesn’t show up because he’s not making enough on the job, given the low bid price (necessary for your margin), or he finds a better option, or who knows.
The more you outsource, the higher your costs. The higher your costs, the lower your profits. The lower your margin, the greater the potential for loss given the predictable unpredictable…and the less leeway for competitive pricing. Outsourcing = Risk = Loss
True Success Is Repeatable
In essence, the above advice is “OK” when taken on an individual basis, but taken together it requires a suspension of disbelief for all these disparate requirements to be there. Success that will generate wealth and independence is repeatable.
You aren’t going to make $10mm on one flip. It isn’t going to happen. But successful flip, after successful flip, after successful flip…year in and year out?
That may be another story.
Here we are presented with a unicorn. It is not a repeatable event, which is what we want when investing in property holds.
We need to be self-reliant in this business. At some point, you build your operation up to a point where you have the capital and the upscale potential in target properties to hire a battery of professionals – who you know and are loyal to YOU (their annuity in human form).
That loyalty makes itself known in terms of the pricing they offer and their commitment to the project. Yes, in those circumstances, outsourcing and other realities become possible.
And I’m thinking aloud here that if you don’t expect there to be structural issues with a home you get at a great discount, you are going to be very disappointed.