I never cease to be amazed that so many new investors gravitate to fix and flipping single family housing as their strategy of choice. Don’t get me wrong, I understand why this is – allure of quick money is strong indeed; and it looks so easy on TV. My experience, however, has been that flipping houses is perhaps the single most difficult and most risky activity under the umbrella of real estate investing, and I unequivocally believe that even though everyone gets lucky once in a while, only the Pros whose businesses are streamlined, automated, and well-funded are able to be consistently profitable with flipping.
Flipping is Risky Business – Really?
While there can be no guarantees in any type of real estate investing, in my view the activity of flipping is more of a gamble than just about anything else that we do as real estate investors. I say this because the two primary risk-mitigating factors in any investment, TIME and MULTIPLE EXIT OPTIONS, are not on your side when flipping. The only exit strategy is to sell the property, and it has to be accomplished on a strict time-frame before holding costs eat you alive. But more than that, even having been as prepared and prudent as can be and having executed flawlessly, you still can’t control the market! A small problem, wouldn’t you say…
The events of the past several years reminded us that markets can change very quickly indeed. Many people started a flip on a house with an ARV (After Repair Value) of $320,000, but by the time the house was ready to go on the market 2 months down the road, it was only worth $270,000.
Think it can’t happen again? Think retail mortgage funding can never again drop off the face of the Earth and take with it real estate values, leaving investors upside down and unable to sell or refinance? This is exactly what happened and it can very well happen again! A lot of investors, and not just the beginners but especially beginners, got into flips with the wrongful presumption that the markets will continue to go up forever. Furthermore, most of them bought and financed their projects in a ways not conducive to being able to rent the property for enough to carry it in case they couldn’t sell. The eventuality that followed were tons of foreclosed upon flips. How many of you know someone who found him or herself in this precarious position?
Here is a million dollar advice: With the exception of a few very high-end markets, be sure to execute your flip at a price-point that will allow you to hold on to it by renting the house should you encounter difficulties selling. This creates a secondary exit option, which dramatically reduces risk in flipping!!!
Mistakes, Mistakes, and more Mistakes
But, let’s say that the markets cooperate – after all a crash such as what we had a few years back constitutes an extreme circumstance in the markets which doesn’t happen often. I promise you that even with the market at large off the table as a risk, which it never really is, there are so many more places to mess up when performing a flip. The following are few of the things that you must get right in order to make money on a fix and flip:
- You must isolate the right location for your flip.
- You must buy the “right kind” of house for your flip.
- You must estimate the After Repair Value (ARV) correctly.
- You must estimate the repairs correctly.
- You must estimate your holding time and costs correctly.
- You must buy the flip for the right price.
- You must finance your flip the right way – boy, must you ever do that!
- Good lock on this one – You must not to run into any major complications with the scope of remodel and/or contractors, which will cost you money and time.
- You must find a qualified credit-worthy buyer.
- Your flip must appraise for enough to accommodate financing for the buyer – this is HUGE in 2013!
- OK – I am out of breath, but you get the point…
These are a few of the things that you must get right, and each one of them is a complete process in and of itself. Messing up a single step in the process will spell disaster. And I repeat, even if you do get everything right, you still have no control of the conditions in the marketplace, which can change within 45 days! All of this makes flipping houses the most difficult activity in all of real estate investing in my opinion.
Granted – there are no guarantees in anything within the world of investing, and getting ahead requires taking a calculated risk. But flipping is in a league of its’ own, which is why in my opinion if you are going to do it – become a Pro.
Do you flip!? Do you agree or disagree? Leave your comments below and let’s talk about it!