July 17, 2020

Business of Flipping Can Be Downright Scary

By Charles Sells

I always say in my presentations that flipping houses is not as easy, glamorous or routine as today’s “reality” TV shows make it look. The truth of the matter is that this increasingly popular investment strategy can be downright scary! What better time and place, then, to showcase the truth than in the October issue of this publication?

I have been involved in buying, rehabbing and reselling homes for 21 years now, long before this strategy had a catchy name like “flipping houses.” So I have seen and experienced enough to know what is usual to encounter – and what is the exception to the rule. The examples I am providing in this brief article are the expected, rather than the extreme.

At this time, I don’t recall where I obtained the data (I believe the numbers came from the IRS), but in 2018 some 19,000 first-time investors attempted their first flip. Of those, only 13% actually made a profit. According to another study in April of this year, 21% of those investors made a profit of less than 10%, which means that after carry costs such as insurance, taxes and resale commissions, those deals likely lost money, too.

So why such popularity if so many are losing money? Like any other get-rich-quick scheme, the popularity is in the pitch, rather than the reality.

The famous playwright George Bernard Shaw said, “Those who can, do; those who can’t, teach.”  That statement could not ring any more true than it does in our industry. The number of coaches, gurus, mentors and workshops out there is staggering. And a large number of them aren’t even actively involved in the very strategy for which they claim expertise. Even more shocking than the exorbitant price tag on many of these programs is the fact that people are actually willing to pay it!

I heard an advertisement on the radio the other day and it went something like this: “Using my formula, I can teach you how to flip homes in your spare time.” Anyone believing they can — or should — flip homes in their spare time has already lost money, before they even set foot in that workshop. This is not some hobby you engage in from time to time. Successfully flipping houses is a full-time endeavor.

The profit in flipping houses is not in what you do to the property, but rather your acquisition cost and how quickly can you turn it back onto the market for a retail sale. You not only need to buy right, you also need to have sufficient cash reserves to cover even more than what you think the repairs are going to cost. Those unforeseen repairs might be a surprise cost to most – and a highly unpleasant one at that, but the prepared professional understands they represent an expected expenditure.

As long as you can accept the fact that nothing in life comes easy and you are not going to do this in your spare time, then there are substantial profits to be made flipping houses in any market cycle.

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