Why don't more people flip?

Question

With all the shows on TV, and all the hype around this type of career or whatever you want to call it, it makes me wonder why more do not take the plunge into flipping properties.  I might be asking this question because in my city there isn't much of this going on.

I have come up with a few conclusions, besides the obvious financial risk , why more aren't indulging in this type of career, but I would like to hear what everyone's opinion is...

DC

N/A N/A · Answer

I too am from Ohio and there are numerous people here rehabbing. So many in fact that it makes it really hard to find that special deal. Its getting to competitive. :shock:

John Cashin · Answer

Half way through my first flip, i've realized:
-not everyone is into real estate
-a lot of people are too lazy to do the work required for the first one
-(obvious) there some serious risk if you don't know what you're doing, and older people i know are especially hesitant because they have a lot more to lose 
-the market is "slowing down" (personally, i don't think its slowing down, i think its changing)
-people think too many people are doing it already
-some people just don't think its worth it

as for the TV shows making it seem glamorous... well i've been watching 'flip this house' series this season and not many people are doing very good with their flips on the show.  most of the people end up being greedy and over pricing their house because they think its worth more, or they lack the work ethic to finish the flip in a timely manner, and no one on that show can make a realistic budget apparently.  i imagine this actually discourages people at this point - but it makes for good television none the less.

Jim Watkins · Answer

Dean,

You are talking of an area that I (mostly) love! I did a rehab on a 3200 sq ft house right by Creek View HS in Carrollton last year and love that specific area.

Here is my opinion of the areas you listed. Keep in mind I am not quite sure what you are defining "competition" as.

North Dallas
Most of N Dallas is a nice area. There are some very high-end houses there as well. In my opinion, if you can find a house that has the proper equity spread in N Dallas... do it.

Carrollton
I don't think most people realize just how big Carrollton really is. There are a lot of markets within Carrollton. Stay away from the extreme North because the new construction will pound you when it comes to selling your house. Mid Carrollton overall is a great area as it has a lot of houses that are not that old and the access is pretty good. Prices are good too. South Carrollton makes me more nervous as it is the old part of town. In my mind that means more foundation issues, roof issues and conversion problems. But the prices there are good so its hard to ignore.

Frisco
Frisco is going to be MASSIVE. Just watch. They have no intention of being known as a big suburb in DFW. No, they want to be known as, Frisco-Dallas-Ft. Worth. Great area but the problem is the prices are nuts already.

The Colony
It's fitting that it is named Colony. I think of a colony as a primitive, old fashioned settlement that was more common a few hundred years ago. I see no reason to change my opinion of the Colony in DFW. The access is terrible, there are virtually no skill jobs there and I heard the public transportation still has 4 legs there. Unless you can get a house for $0.50 on the dollar there.... don't bother.

Plano
Plano is the ideal place to have a house to rehab and sell. It has outstanding access, a wide range of prices for housing, it's very clean, great schools and can you tell I am biased when it comes to Plano? lol
Seriously though, it's massive in geographic terms and it has the population to match. Think there's a connection?

One big piece of advice I can offer is this:
STAY away from areas where there is new construction going on. Why? Until the builders play fair... You won't beat them in a sale. They simply offer too much to a buyer. Like all closing costs paid, free upgrades and 100% financing.

Good luck. I am starting a minor rehab in Mesquite this week.

-Jim Watkins

N/A N/A · Answer

dfw,

how do you feel about rehabbing competition in dfw, and specifically in the north dallas/carrollton/the colony area/frisco/plano area?  i did my first rehab in this area, and i'm hoping to do my second one by the end of the year.

-dean

Jim Watkins · Answer

So true! I just sit there eating popcorn and watching the train wreck happen in slow motion. :roll:

Wesley,

It's got to be the best hour of comedy on TV!

It seems they glorify newbies for making mistake after mistake only to show them making "ONLY" $75,000!

Pffft. Not in my world. lol

-Jim Watkins

Ryan Webber · Answer

Well, dealer status doesn't necessarily come with selling within 1 year.  Now selling within 1 year will always be a short term capital gain, which will always be taxed at your higher income tax level and not at the 15% long term capital gain rate.  That is unless you utilize a 1031 exchange.

Now, the parameters of dealer status aren't concrete.  You can be tagged as a dealer if your primary business is "dealing" houses.  That could be 1 house, I guess, or 50.

If you are tagged as a dealer then you will be paying self-employment tax on everything you make, and you will lose any 1031 privileges.  There are ways around the dealer status and tax issue.  The main one being your corporate structure.

If you are planning on flipping houses, it's always good to first consult with a qualified accountant and lawyer who is knowledgeable in real estate.

Jim Williams · Answer

very good points. it would probably be best to talk to a tax attorney to get all answers at once. i have one LLC right now, but is a single purpose entity. i will be setting up another soon, so i will definitely look into this when setting it up.

jim

Jim Williams · Answer

another reason would be taxes. you're considered a dealer if you sell within1 year, and thus pay much higher taxes.

jim

Eric Medemar · Answer

At first glance it seems that people dont become real estate flippers becasue of the risk involved.  Is real estate investing really risky though?
To me, the measure of risk is how many factors are there that cannot be controlled. People might say that bungee jumping is risky, it may be risky if your doing it off a shaky wood bridge by a drunk guy in mexico, but bungee jumping is really not risky at all when you are doing it at a place that does bungee jumping everyday and has a time tested track record.

When you say something like bungee jumping is risky you are really saying that it puts fear in you to take a chance with someone else, or something else controlling whether or not you live or die.  In real estate, a transaction could be risky if you dont know and understand your market and what the current real estate trends are in your area.

By becoming an educated investor you can all but eliminate risk.  If your market is slow you must buy low so you can sell low.  If things are changing very quickly then do some wholesaling so you never actually have to hold a property. Learn the costs of materials, learn how to pull proper comps, learn to inspect a property correctly, and above all learn to trust yourself.

I believe that the one reason more people dont get into flipping properties is not because of risk, but instead because of self doubt.  They see themselves as the drunk guy with the bungee business on a shaky bridge in Mexico.  Educated real estate decisions carry a small risk factor, uneducated real estate decision are very risky.

I talk to at least 300 people a year who want to invest in real estate but have not, will not, and cannot.  They have not because they dont believe that they are smart enough (too risky). They will not because they dont think they can never be smart enough. They cannot becasue they wont allow money to be invested with a dumb person (themselves).  Meanwhile in the exact same market that is "so risky" I am making money hand over fist ($100,000+ already in 2007) :beer: . Which further proves people may think that they dont invest because of risk, when in reality they dont invest because they dont trust themselves.

Account Closed · Answer

There are a few reasons why people don't do this.

1. Many people want to. Thousands show up at trade shows, free seminars, bootcamps, etc. All expecting to make the fast buck, to get the life they see on the infomercial. The thing about the informercial is they show the best deals the person ever did. While most don't come anywhere near that. So when the people realize you actually have to do some work, they go back to the security of their 9-5 job.

2. FEAR. Need I say more. Most people aren't cut out to be an entrepenuer, that is why most people in this country are employed by others. They don't have the courage to go it on their own.

3. TV - Alot of people also watch ER, but you don't see everyone racing out to be a NURSE. Look at how many doctors the nurses hook up with. But yet we still have a nursing shortage in this country. Most people watch TV for enjoyment, not to learn a new career path.

4. IGNORANCE - Do I really need to explain this one?