Well, I hear that flip itself doesn’t create profit and time and effort spent make the property sell at faire market value.
Meanwhile flip is not (or should not be) dependent on house value appreciation.
So when you flip a property and make profit, where is the money really coming from?
The whole "you make money when you buy" vs. "you don't literally make any money until you sell" discussion reminds me of a guy I studied martial arts with for about 10 years.
For 10 years, our sensei would talk about "muscle memory" (the idea that if you perform the same physical action thousands or tens of thousands of time, it become engrained in you to the point where you do it perfectly as a reflex without thinking about it). Clearly, everyone with a bit of understanding of biology understands that "muscle memory" is formed by synapses organizing/firing in a certain way in your brain (since your brain controls your muscles along with everything else in your body), but this guy was convinced that everyone else thought that muscles really had a memory. Every time someone would use the term "muscle memory," he'd complain that "MUSCLES DON'T HAVE MEMORY!!!"
This conversation feels the same way. While some may talk about "making money when you buy," most of us understand that LITERALLY, you don't make money when you buy. It's a phrase to highlight a key point in investing -- that if you want to consistently make money, you need to make the right choices at the purchase more than anywhere else in the process.
That said, I will concede that you don't literally make money when you buy (unless you finance for more than 100%)...and also that muscles don't really have a memory... :)
Not sure what you mean in the first paragraph, I agree with the second one.
Answer to the last question. You buy a house with for example, an after repair value of 150,00, if you have 15,000 in holding, closing and selling costs, 5,000 in cost of money, 30,000 in rehab and you buy the house for 75,000, you make 25,000 profit.
Answer to the last question. You buy a house with for example, an after repair value of 150,00, if you have 15,000 in holding, closing and selling costs, 5,000 in cost of money, 30,000 in rehab and you buy the house for 75,000, you make 25,000 profit.
So in this example there was no profit made by selling or flipping. the profit was made when you purchased the house for $75 k which is definitely below its real value even without any renovations; other wise it would have sold for zero profit or a loss
Some folks will say that you make your money when you buy... it's a false statement. You spend money when you buy, and make money when you sell.
Or to put it in another way - everything up until you sell the house is an expense, not revenue.
You can buy a house that seems great with lots of spread, then the market can change for the worse and your spread can disappear and you can lose money on what seemed to be a surefire deal.
The profit in house flipping comes from arbitrage and the simple fact that many people would never consider buying a distressed property as renovation is expensive, tricky, and can go very wrong.
The key is that in some markets, and some property, renovation dollars put into the property are asymmetrically linked to the value of the property. IE: A dollar invested is worth a dollar fifty on the retail market.
Sometimes, if the case for arbitrage is strong enough, the ability to buy a product (Inventory... house) unto itself is enough to create value. For example - someone's need to sell the house immediately creates a value gap in which they will sell for below-market rates to the first person who comes along and waves a fat wad of cash in front of them, regardless of whather or not that amount of cash is what they could get for the house if they marketed it normally.
Or to put it in another way - everything up until you sell the house is an expense, not revenue.
You can buy a house that seems great with lots of spread, then the market can change for the worse and your spread can disappear and you can lose money on what seemed to be a surefire deal.
The profit in house flipping comes from arbitrage and the simple fact that many people would never consider buying a distressed property as renovation is expensive, tricky, and can go very wrong.
The key is that in some markets, and some property, renovation dollars put into the property are asymmetrically linked to the value of the property. IE: A dollar invested is worth a dollar fifty on the retail market.
Sometimes, if the case for arbitrage is strong enough, the ability to buy a product (Inventory... house) unto itself is enough to create value. For example - someone's need to sell the house immediately creates a value gap in which they will sell for below-market rates to the first person who comes along and waves a fat wad of cash in front of them, regardless of whather or not that amount of cash is what they could get for the house if they marketed it normally.
very good remark
I believe forclusore is also another example of: "... if the case for arbitrage is strong enough, the ability to buy a product (Inventory... house) unto itself is enough to create value..."
Generally, you'd be wrong. Banks selling foreclosure houses go out of their way to avoid arbitrage, and as a whole they're usually pretty good at it. (Except for very small, badly-run banks)
Banks go out of their way to advertise houses correctly, at the correct listing price, and wait until a buyer comes along to give them their market value.
The key to the foreclosures is not arbitrage, but rather that the houses they're selling are generally in poor condition compared to other houses in that area, and can therefore be bought cheaper than other houses in that area.
"Flipping" means different things to different people. We chase these deals and almost always lose because people we're bidding against are buying themselves a job instead of making their money work. When you hear stories about X% cash-on-cash return you generally need to take it with a grain of salt. If the person doing them project imputes their time the returns are often less impressive.
Having said that there are plenty of rehabbers that do very well for themselves.
I am yet to see a bank "go out of their way to advertise houses correctly, at the correct listing price".
Mostly banks advertise for what they are owed, which is nearly always up to double the current value.
After many weeks/months of being ignored because the price is so ridiculous they eventually sell it at fair market value which the market dictates. For some reason they think holding a vacant house and paying all the associated costs attached is better than actually listing a house at a price it will sell at :-)
Having said that there are plenty of rehabbers that do very well for themselves.
Correct me if I am wrong but my understanding is for lower end properties (of $ 150 k and lower) the profit is basically equals to an hourly wage of the time and effort you put in to make the whole process happen. However for the higher end properties (of $600 k and higher), the reward will be much higher (when calculated based on the hours and effort) if you can afford the costs and find the right deal.
Are you saying that for forclosure properties, asking price is higher than market value ?
No....you most definitely SHOULD make your money when you buy, if your numbers are correct ( and they should be if you know what you are doing ) then ALL your expenses should be calculated ahead of time, including padding for any unforeseen, making your deal work. I have never bought a rehab that I have ever regretted or worried about because I never over pay, my numbers are what they are and I dont pay a penny over, whether it be auction or anything else. If you cut yourself to the bone to buy, then most times you will get bit.
I agree with David. “you most definitely SHOULD make your money when you buy” otherwise no matter how god of a job you do for rehab and also marketing for sale, it will end up being a loss.
But this will arise another question that if you never over-pay, where and how do you get the right property in this competitive market. When a house is listed, you will not be the only one who wants to purchase. or basically where do you go for finding the right property.
David - wait long enough and you will absolutely experience a black swan event that kills a deal for you.
And mathematically speaking, you absolutely do not make money when you buy a house... you make money when you sell it. "You make your money when you buy!" is nothing more than ra-ra guru speak. Exactly the same as "The Method" and "The Law of Attraction", "Carpet cleaners that work" and "Nigerian Prince wants to give you all his money"
Dean - Your market must be very different from mine. Foreclosure listings in Atlanta are often well-researched prior to listing, then listed with a professional agent, and usually go under contract within hours or days of being listed. The payoff amount seldom has anything to do with the listing price.
And.....thats where the old favorite real estate adage comes in Alex, location, location, location, if you look at yours, then mine, tells my story. ;) Our market is and has been always different from yours.
I am a realtor and contractor which also helps my cause but pounding the pavement and crunching numbers is always your best bet. Auction, MLS, FSBO,REO I have worked them all.
Yes Aaron, I do understand the difference between spending and making, and I dont subscribe to any guru garbage but when you buy right, your money is already made, no matter what comes up, at least in my market and situations.
While I understand your fear of the "black swan event" it must be my contractor side that allows me to have no fear of making money off every rehab I buy, if it doesnt fit my price, I wont buy it.
David - I am also a licensed contractor and run a fairly successful construction company. I'll retain my productive paranoia - it's served me well.
I realize that arguing on the internet is stupid and makes idiots of both of us, so this'll be the last try at it -
Your money is not made when you buy. It's literally a non-true statement, mathematically so. You don't make a penny until you sit at the closing table and receive a giant check with your name on it. Saying, or thinking, anything different is just 'positive thinking' and a potentially very dangerous outlook.
It's the same as saying, "You're drunk the minute you decide to get a beer!" or "That report was done before I even started writing!" or "I'm CERTAIN it won't rain today, because I did my special rain dance!" ... wishful thinking, nothing more.
Wow, there is a lot of literalism and semantics in this thread...normally those are only the threads I participate in... :)
As far as making money when you buy, I believe mathematically that you do. Here's my "proof," if you will:
1. In my opinion, EQUITY = MONEY.
2. In my opinion, a good rehabber earns most of his profit from the equity he generates at purchase.
3. Therefore, transitively, most of the money is earned at the purchase.
That said, you have to agree with 1 and 2 for 3 to be mathematically correct and not everyone will agree with 1 and 2...nothing wrong with that...again, just my opinion.
In addition to my comments above, if you want to be ultra literal and logical, consider this...
Most people define money as a currency for trade/bargaining. Which means that until it's used for trade/bargaining, the stack of green paper or the numbers on your bank statement are not really money, they are just objects with absolutely no intrinsic value.
If you look at it from that angle, money isn't made when you buy or sell...it's made when you take the currency from the sale and spend it on something else.
Again, that would be the ultra literal view, assuming your definition of money has to do with value and not just objects with no intrinsic value. Sheesh...I feel like I'm back in a philosophy class or something...
Guys, this is not really about semantics, shemantics of one statement.
“You make money when you buy a house” could be either false or true depending on how you look at it and how you interpret it. We are not philosophy professor to be theoretical and discuss how a statement can be interpreted in theory, neither linguistics or literacy experts, so I would like to get responses that are “”practical”” and informative.
Having said that reading all these different opinions have been very beneficial to a beginner like me; I also like to get a comment or input on my earlier question on this thread which nobody has addressed it yet:
I believe that you're making the mistake of blurring lines between "Money" "Value" (Or "Worth") and "Currency"
When you buy a house, you lose currency and gain an asset with an assumed "Value"... for the discussion at hand, we could talk about the "Current" Value of your new asset (Which should be right about what you just bought it for, being that you're the market which has just spoken.)
We can also talk about the "Future" (or, as we investors like to say, "After Repair Value") of the asset. That's the value of the asset after you get done converting a lot more liquid currency into the asset.
When I say "You don't make money when you buy, you make it when you sell" I mean that you lose access to currency, and you don't gain MORE currency until you sell the asset.
In the meantime, all kinds of badness can happen to your asset. It can get hit by lightning, struck down by a meteor, or the local market can decide to take a giant and unexpected, unpredictable 60% value hit (AKA, The Black Swan Event) - in which case, your best projections go out the window and you will not gain more currency upon the transfer of your asset no matter what you want, wish, or how many Buddha bellies you rub at the Canton Cook restaurant.
(And don't try and tell me about insurance, you hair-splitter. You know darn well the point I'm trying to make here.)
So while I would agree that EQUITY = VALUE, I do not necessarily share the opinion that EQUITY = CURRENCY... At least, the last time I tried to pay for a meal at Canton Cooks by explaining that I'd give them a .00005% share in my most recent flip, they laughed at me and told me that I better start washing dishes.
Sadly, Houses make terrible fiat currency, and rarely do people want to accept a .00005% equity share in exchange for my hamburger and beer for lunch, to be paid as soon as I sell the house... even though Mr. Kiyosaki assures me that I "MAKE MONEY WHEN YOU BUY!!"
OR, as my wisened Uncle (RIP, Rick), once told me - "You can't eat Equity, boy. Not unless you HELOC, anyway."... and a HELOC is really just another word for "Installment Sale"
(And yes, you could argue that CURRENCY is susceptible to black swan events as well... economic downturn, inflation, etc.... that's self-evident, and totally not what we're talking about here. We're talking about the conversion of liquid currency to a hard asset, and then the conversion of a hard asset to a better hard asset via infusion of liquid currency, followed by the reconversion of that hard asset to a greater amount of currency than was injected into that hard asset over the course of purchase and ownership)
I guess you could say that. But, consider that the house I sold two days ago for $157K generated $32K in profit and I spent about 10 hours on the project in total. My wife probably spent about 5 hours. So, between us, we earned over $2000/hour.
I'm okay earning hourly wages of $2000/hour...
Most people define money as a currency for trade/bargaining. Which means that until it's used for trade/bargaining, the stack of green paper or the numbers on your bank statement are not really money, they are just objects with absolutely no intrinsic value.
If you look at it from that angle, money isn't made when you buy or sell...it's made when you take the currency from the sale and spend it on something else.
Again, that would be the ultra literal view, assuming your definition of money has to do with value and not just objects with no intrinsic value. Sheesh...I feel like I'm back in a philosophy class or something...
Money, at least in America, is about easily-converted Fiat... it has the value that we all agree that it has at any given moment.
So there's another way you can unexpectedly lose money on a flip - an external force that causes enormous deflation of the currency you used to buy the asset (Dollars), assuming that you can't get someone to buy that asset with a stronger currency (Say, Yen, 'cuz we all know the Chinese are gonna buy America. )
So there's another way you can unexpectedly lose money on a flip - an external force that causes enormous deflation of the currency you used to buy the asset (Dollars), assuming that you can't get someone to buy that asset with a stronger currency (Say, Yen, 'cuz we all know the Chinese are gonna buy America. )
And the weakening of the currency doesn't have to happen during the flip...it can happen after you sell the flip and before you reinvest the money. The resulting loss is exactly the same. So again, that supports the argument that you don't make you money until you reinvest it.
But, I don't think most people care about the semantics...so I'll stick to my belief that you make the most money (in the form of equity) when you buy.