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Reality TV Real Estate Flipping: How ‘Real’ is It?

by Clay Huber on October 6, 2012 · 11 comments

  
reality tv real estate flipping shows

Hi. My name is Clay and I’m a reality TV addict.

Survivor, Shark Tank, The Amazing Race, Big Brother, and the list goes on…

At the top of my list though are the reality shows about real estate, in particular, flipping. I am a sucker for them, and if I’m honest, they were a big reason why I decided to get into real estate in the first place. I mean don’t you see the massive amounts of profits real estate investors make in 30 – 60 minutes?!?! Crazy!

How “real” is all of it though?

My stance after having lived through multiple flips and deals: Very Unrealistic.

If you’ve been on BiggerPockets long enough, you surely have seen someone talk about how real estate is not as easy as it appears. And you know what? Those people are absolutely right!

If you are thinking about getting into real estate, do not base your decision solely on what you see on TV. As obvious as they may sound, I sort of fell into that boat.

If you have already decided you want to get into real estate, do not base your education solely on what you see on TV.

If you have years of experience already, then please add your thoughts to the comment section below. I’m sure  I will leave out plenty of characteristics that separate “real” real estate from “reality TV” real estate.

I want to talk about two of the main “warps” I see these shows contain.

The Time Warp

This is what still throws me off to this day. These shows are either 30 min or 60 min long, so right from the get-go the overall context is just flat out unrealistic. Sure, they do show “Day 1″… “Day 13″… “Day 37″ as the show progresses, but in my experience, that doesn’t do any justice. Case in point, “Day 1″ on the shows is the first day of construction. What about all the time that is required to:

  1. Find the deal.
  2. Get offer accepted after negotiating.
  3. Create scope of work and line up contractors.
  4. Actually close on the deal.

From a TV business standpoint, I completely understand ‘why’ they can’t go into more detail with these aspects. Time is limited and they need to keep the flow of the show going.  I really wish the four above steps only took the 2-3 minutes the show devotes to them (if that, some don’t even cover it), but in reality, those four steps could easily be 2-3 weeks or months, depending on the situation.

Going back to when “Day 1″ starts according to the show — construction — things don’t get much better. I truly wish contractors did work as fast as they appear to on the shows, but the reality of the matter is, things take time. When you are “living through” it rather than just seeing one scene cut to another scene that says “1 week later”, there is a big difference. That “1 week” you live through is going to be much more intense and time consuming compared to sitting on your couch watching the “1 week” go by in a matter of seconds as they change scenes.

Bottom line, if you sit there and think, “Wow! They just made $35,000 in 45 days,” you can rest assured the actual time (from finding the deal to making it to the closing table to sell) was more then 45 days or whatever timeline they’re putting on TV. This leads into the next big point…

The Math Warp

Did they really make $35,000 profit? I hope I don’t burst anyone’s bubble, but they sure DO NOT! Is the actual math wrong in terms of addition and subtraction? No. Is the math wrong in the sense they do not factor in many of the costs? Oh yea!!

I just have to sit back and shake my head when I see this pop up on the screen at the end of the show…

  • Paid: $50,000
  • Rehabbed For: $25,000
  • Days on Market: 8 days
  • Sold For: $110,000
  • Profit Made: $35,000

Grrrr! What a total joke, and quite frankly, complete deception. The only number that I have no issue with is the “Days on Market.” I have no problem accepting that a house sold in 8 days. As far as everything else – give me a break!!!

Yes, the math does work like we were all taught in school: $110,000 – $50,000 – $25,000 = $35,000. If you’ve ever lived through a deal, you know there are all sorts of number’s that impact this equation. Let’s take a look at a few…

Cost of Money, Insurance, Property Taxes, Utilities

Is there a loan associated with the purchase? More often times than not, there ‘is’. If they were using private money at 11% for 45 days on $75,000 that totals $1,017.12 as an additional cost. As for insurance, property taxes, and utilities for those 45 days let’s say that amounts to $600 additional cost.

Cost of Commission

If they got a sales time of only 8 days, then odds are, they used a real estate agent (I remember that Property Ladder show where people would try and sell it by owner and they’d show “1 week… 2 weeks… 2 months… 3 months… “at this point we decided to hire a Realtor” “). What was the commission the agent charged? Let’s just call it 6%. On a $110,000 sales price, that is $6,600 in additional cost (ouch!!).

Cost of Closing

Those title companies and/or real estate attorneys don’t work for free. Let’s just call this $300 for closing cost.

Equation Redone

$110,000 – $50,000 – $25,000 – $1,017.12 – $600 – $6,600 – $300 = $26,482.88

A bit different than $35,000.

*NOTE: All #’s were taken from the 45 days, but remember, the ‘actual’ hold time for these deals is more than likely longer than this, so holding costs would be more.

I know what you’re thinking, “$26,482.88 still seems like a good payday to me!” I do not disagree in the slightest! My point though is there is A LOT more that goes into things compared to what the TV shows tell you.

No argument will ever be given from me in terms of how lucrative real estate investing can be, but the TV shows make it seem much more “smooth” than what it really is.

Tip of the Iceberg

These two things are only a couple of the major disconnects from reality TV to the real worth of real estate investing, but I’m here to write an article, not a novel :-) With that being said, what are some of the other things you’ve seen from experience that the TV shows total whiff on and/or completely ignore? Post your thoughts and observations in the comments below as I’m genuinely interested in getting other people’s observations.

Is real estate a good place to make money? Yes. Is real estate as easy and quick as reality TV makes it look? No. Always remember that when you are sitting on the couch with your popcorn thinking, “Hmmm, this real estate thing seems easy. I’m going to call my boss tomorrow and quit my job.”

Photo: Linus Bohman

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{ 11 comments… read them below or add one }

Dale Osborn October 6, 2012 at 10:00 am

By having shows like they do about real estate there are many who jump into real estate investing without getting the required education. After having their eyes opened to the fact that it is not as easy as it was shown on TV – they become a motivated seller. Another investor who does have the education then has the opportunity to take it off of their hands at a deep discount and turn the property around. If they are smart they will retire from investing until they get the required education under their belts. If not they will end up repeating the disaster again.

Dale

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Clay October 8, 2012 at 6:46 am

Exactly Dale. Going into real estate without any ‘true’ education is basically making yourself walk the plank.

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Mike October 6, 2012 at 8:43 pm

I couldn’t agree more Clay. It’s never that easy, never that clean and there is always other costs involved. The reality house flip shows are certainly good for getting the word out on how much fun and lucrative this business is, but it is glorified and misses many of the real realities.

I do have to admit, I love Shark Tank though. Great show, that seems more real world than many of the house flip shows. Excellent post here btw, spot on!

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Clay October 8, 2012 at 6:48 am

It’s all about the ratings, so the producers will do whatever it takes to appeal to the masses (I don’t blame them, they’re just doing their job as producers).

I’m with you though, Shark Tank seems pretty real. I do know that each pitch is actually at minimum an hour – two hours long, so there is quite a bit of editing; however, the sharks actually ‘are’ putting their money in harm’s way.

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Joe October 7, 2012 at 7:49 am

Mike glorified isnt even the word for it. The problem is when someone sees another person getting a check with a profit of 50k on it for the month they WANT to believe whatever happened before it is worth it. Many people just do not understand and never will, i believe this is why the failure rate of entrepreneurs is so high. Everyone wants the reward, but they are lying to themselves before they go into their ventures. If people would really research what it takes, most would realize they are not willing to do the work, but they dont, they move forward… give up and fail. Sad.

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Clay October 8, 2012 at 6:51 am

So true Joe.

That’s what makes up the free market though. These people who DO NOT do their homework and research are the ones who end up becoming motivated sellers. The people that DO do their homework and research are then more then happy to gobble up these properties produced by the motivated sellers.

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Karen Rittenhouse October 8, 2012 at 8:53 am

We’ve bought more than one property from a newbie who bought after watching the flip-it shows and lost their butt.

Another huge cost they don’t address is short term capital gains.

A flipper can pay 35%-50% to Uncle Sam!

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Clay October 8, 2012 at 9:30 am

TOTALLY forgot about Uncle Sam! Excellent point…

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Candyce October 9, 2012 at 8:43 am

Great point Karen!
What is the best way to flip and keep my share to Uncle Sam as low as possible?

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Clay October 9, 2012 at 9:28 am

I don’t mean to speak for Karen, but that is probably a question best asked to a CPA.

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Karen October 9, 2012 at 10:41 am

Candice –

The most important thing is to have hold properties so those write offs help offset the gains from your flips. Besides, THERE’S NEVER BEEN A BETTER TIME TO BE A LANDLORD (I’m passionate about that – can you tell?)

And, be sure to have a CPA who specializes in real estate so they have the best chance of knowing all the write offs you’re allowed. Research this area because, ultimately, your success is up to you!

Thanks for the question and much success to you in your investing.

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