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.