Posted 7 months ago

5 Reasons We've Stopped Flipping

Ask a stranger what they think of when they hear someone say “I make money in real estate,” and chances are good that they’ll mention shows like “Flip This House.” The strategy is to buy a house cheap, fix it up, and sell it for a profit. Indeed, we have made great profits on some of our flips.

After hundreds of flips, however, we have found it to be the worst, most risky strategy in residential investing today. In fact, we have launched an entire business around helping real estate investors avoid the pitfalls of flipping; “flopping” would be more accurate.

Before we go into our reasons, I’d like to make one thing very clear. Flipping houses can be very profitable. So can investing in an early stage tech startup. If the company turns out to be Facebook, then it was a great investment; if it turns out to be smacebook, well, there goes your money.

We look for smart returns and higher than average rates. Flipping failed our test. It failed, due to the numerous hassles, roadblocks, government agencies, and downright irrational behavior in the flipping world.

Here are our reasons.

1.) INSPECTORS: When you do a flip, most buyers will be working with a Realtor, and 99 percent of Realtors recommend hiring a professional home inspector. Inspectors perform a valuable service, but they also scare off a good percentage of buyers. We have seen inspection reports on homes that have been meticulously maintained that still have significant inspection issues. Inspectors will find issues with the home, and the buyer’s Realtor will probably ask you to deal with some or all of the repairs. These repairs will significantly eat into your profits.

2.) PRIOR MLS LISTING HISTORY: Oftentimes, the properties we buy to flip are found in the Multiple Listing Service. After we do a total rehab and relist it in the MLS for sale, every Realtor knows exactly what we paid for the home and what we are trying to sell it for. Realtors often use these facts to try to negotiate a much lower price since they know the home is being “flipped.”

3.) REALTORS: Realtors provide a valuable service, but, of course, they also expect to get paid a commission. The seller typically pays the commission. In a traditional flip, the commision is paid by the investor who is flipping the house.

4.) APPRAISERS: Most traditional mortgage companies require an appraisal of the home you are selling. There is nothing more frustrating than a buyer who falls in love with one of our homes only to have the appraiser come along and say the house is only worth $170,000 instead of $175,000. We have a question for you to ponder. If appraisers can only use previous sales to justify values, how can values ever go up?We have asked this question many times and have never gotten a straight answer from anyone. If you have a willing buyer and a willing seller agreeing on price and terms, then in our book, the home appraises.

5.) MORTGAGE COMPANIES/BANKS: Many mortgage companies and banks have “FLIP” rules to help “protect the consumer.” I guess somewhere along the way, there were some dishonest appraisers, loan officers, investors, and Realtors, and “flipped” properties got a bad reputation. This is really frustrating when you are truly bringing value to the real estate marketplace by purchasing a distressed property, investing your hard-earned money into the home, and trying to sell it at a reasonable market value. Isn’t this the American dream? Invest your money into something, make it better than you found it, and sell it for a profit? For reasons we will never fully understand, the government, mortgage companies, and banks all seem to have a problem with flipped properties. Sometimes, lenders won’t lend money on a home that was sold within the past three to twelve months, and will often request two separate appraisal reports. I guess this is to make sure one of the appraisers is not in cahoots with the seller or Realtor and inflating its appraised value. By the way, in the case of FHA loans, the lender requests two appraisals and only allows the buyer to pay for one. Guess who has to pay for the other one? You! Also, lenders frequently ask us to email them a list of all the repairs we have done on the house—and proof of what we paid for the home. They want this information even after it has appraised at full value! twice! We usually tell them to take a hike and that we paid $1 for the house. The house either appraises or it doesn’t! What business is it of theirs what we paid for the house? As you can see, this is a touchy subject with us.

Stop Flipping is not a command, it is a philosophy.  Since we are providing the financing to the buyer, we sell as-is. Financing is the most valuable service one can provide in real estate. We do not list on MLS, so we do not have the problem of realtors attempting to low ball us. The buyer is more than welcome to bring a realtor, but in a seller-finance deal, they pay the commission. No appraisal is required on seller-financed deals. And since we are the financiers, none of the “flip rules,” apply.

As we learned this new method of real estate investing, we decided to go all in. Hundreds of houses later, and we couldn’t be happier with that decision.



Comments (11)

  1. Tiny 1499890041 avatar johnblackman

    Flipping can be a great course in learning real estate.  The first few will teach you a ton about all parts of the trade. So even if you don't make as many dollars, you will gain a lot of knowledge.

    We stopped flipping for many of the same reasons and went to new construction which carries a different kind of risk, but the final product has the following benefits.

    1) Premium product

    2) New layouts so you're not converting smaller rooms

    3) You don't buy surprises, at least not mechanical ones, maybe permitting ones

    4) Financing and inspections aren't a problem

    5) Realtors still have a high price tag.  My solution was to marry one, obviously doesn't work for everybody.  Price your project so the commissions aren't a problem

    6) Not as many people doing it

    Like most other deals, you make your money on the buy side.  If you don't get a good price for the land, know your exit pricing, and costs, you can get burned.  Having a quality builder who can build *fast* is the most important piece in my opinion when building.

    I sympathize with all of your points. 


  2. Tiny 1486241284 avatar williamc90

    That's really a shame.  I could argue why each of the 5 reasons help us to earn more money on our flips.  A good realtor won't allow a "previous price" to be negotiated, nor will they allow you to over shoot the ARV if their aren't comps.  Lastly they'll have 5 rockstar mortgage guys so if one fails the net slides in and closes the deal.  Oh, and they keep the deal together when the inspector "scares" the buyer.   You didn't need to quit flipping, you needed a new realtor.  Sorry to hear that.


  3. Tiny 1512854274 avatar kanwarsodhi

    Thank you for the article, it definitely helps clarify that flipping isn't easy and it does require patience and resilience.


  4. No avatar

    I would like to address your points as both an investor (1st) and real estate agent (2nd).  The problems you mention are actually common problems that Realtors representing sellers have to deal with all the time.  They're part of the business.  It's the nature of the beast.

    1.) INSPECTORS

    Every time anybody buys a property, it should be inspected.  Even flippers.  It is only fair if everyone gets to have a chance at due diligence.  It is natural for buyers to negotiate after the inspection, and it is also fair for you as a seller to renegotiate.  This happens regardless of whether a property was flipped or not.  In a hot market such as right now, you can even refuse petty price hikes.

    2.) PRIOR MLS LISTING HISTORY

    This shouldn't be a problem.  The market value of a home is based on what homes similar to it has been selling for.  This is the way homes are appraised.  It shouldn't matter what the seller paid for it.  So if someone who bought their home in 1950 for $10,000, should they sell it for less because they bought it low?  Not really...  The price depends on what the market is willing to bear.  I'll leave it that, get creative with it.

    3.) REALTORS

    You don't have to pay the commission.  Don't use Realtors.  Don't use the MLS.  DIY and post the home where it will take a LOT of work to find ready, willing, and able buyers.  But you want your homes to be sold quickly and top dollar right?  You'll need the MLS and Realtors bringing the buyers.  It's the cost of doing business and should have been built into your math.  Realtors are part of closing costs.  It's why everybody says to buy at 70% ARV or less.

    4.) APPRAISERS

    If you do the math right, your ARV/price estimate should be very close to the appraisal.  New comps show up over time and you have no control of the future.  And yes, homes do sell for above appraisal value all the time, especially in a hot market.  What you'll want is a buyer with stronger financing (conventional mortgages / 20% down) and not FHA/VA.  Why?  FHA/VA buyers have no skin in the game (no/low down payments), hence the ridiculous and strict underwriting by their lenders.  When you accept an FHA offer, you should be ready for all the shenanigans.  I.E. strong negotiating is important.

    5.) MORTGAGE COMPANIES/BANKS

    Nothing to add here, other than just refuse ridiculous requirements that FHA lenders have.  Don't pay for 2nd appraisals, make the lenders do it if they won't let their buyers pay.  You are allowed to negotiate.


  5. Tiny 1493412838 avatar olegk3

    Great article. Definitely on point. I was thinking about doing a flip earlier this year but changed my mind. I totally agree with everything that is stated here. I am a real estate agent myself. 

    But I also know people that do flips on consistent basis and are very successful in it. So i guess it is just a personal preference of everybody.


  6. Tiny 1489521426 avatar whitneyt

    Thank you for this article! Definitely some good points to think about! 


  7. No avatar

    Thank you. Could you explain more how you hold the mortgage and for how long? What if they don't pay & it tAkes years to foreclose?


  8. Tiny 1475988388 avatar rener11

    Hi Colin,

    Thanks, this article help me get some clarity,  I've been wrestling a few months of where I best fit.  This was very helpful.  I lean toward wholesaling and rural land.  I'm copying your note to my Evernote.   It's a gem, especially the last paragraph


  9. Tiny 1454128111 avatar bulldogcapaz

    Thanks for the post! I am a wholesaler so I definitely know the many things that can come between contract acceptance and close.  I do however recommend a professional inspection.  $350 is a small price to pay to avoid some traps.  Plumbing, roof, HVAC, etc. are all things that may not be seen to the naked eye and it can help you avoid pulling \that trigger.  


  10. Tiny 1506291859 avatar rogerm47

    excellent


  11. Tiny 1493166672 avatar garyd50

    Thanks for the article Collin!  As someone looking to get off the ground in real estate through the method of flipping its good to know the cons to flipping and I especially like the fact that you included a solution via the method of seller financing which is something I will spend a great deal more time learning about now.