Thursday, October 05, 2006

Flipping Houses: Reality TV Disconnects on Real Estate

House Flipping -- as portrayed on reality TV -- is not plugged into reality. Here's a list "Five Reasons Why Real Estate "Reality TV" Isn't So Real," based on the book: Buy Even Lower: The Regular People's Guide to Real Estate Riches by Scott Frank and Andy Heller

Here's the release:

"The reality TV view of house flipping—that you magically find the right property, buy it, fix it up, sell it effortlessly, and enjoy a hefty profit—is misleading at best. It conveniently leaves out the time, the risk, the stress, the headaches . . . and the failures.

To help new investors, Frank and Heller have put together five reasons why buying and flipping property isn't usually the cakewalk portrayed on TV.

1. Flipping can be extremely time consuming.

Many people aren't prepared for the large amounts of time that go into house flipping, particularly during the buying phase. To profit, you will need to purchase at a deep discount (often 25 percent or more). Because the pool of properties with this type of discount is usually small, you'll usually have to work extra hard and invest significant time to find them.

2. Costs can get out of hand.

Big discounted properties are discounted this way for a reason. Most of the time, it is because they will require significant repairs before they'll sell for a profit. What's more, many misguided, first-time investors come in looking to make the dramatic changes they see investors making on reality TV—unaware that their goal should be to make the property comparable to surrounding properties, not better than them.

"There is a difference between remodeling a property and making necessary repairs," says Heller. "Often the houses you see flipped on TV go through dramatic changes: new kitchens, changes to the exterior, extravagant additions, and so forth. Those investors are often spending big money on changes that aren't necessary in real life but make for good TV."

"These extra repair and improvement costs can take a big bite out of your profits. Focus on the necessary changes. Repair broken windows and fix a leaky roof, but don't put in a new swimming pool simply because it will make the house more valuable."

3. House flipping is a stress-filled business.

Because profits are actually realized after the sale of the property, every day that goes by—and that the property goes unsold—eats into your profits. You'll want to sell the property as quickly as possible, which at times can cause many headaches.
All of this stress can be overwhelming for first-time flippers. If you know what to expect, you will be better prepared for real estate success.

4. You may end up with a property that is hard to sell.

Occasionally, you will buy a property at a discount because it needs more than simple repairs. It may even have problems that can't be repaired at all. Is it in a bad neighborhood? Too close to a busy street? Was it built on a steep hill? These factors will allow you to pay a discounted amount for the property, but they may make it difficult for you to sell when the time comes.

"You don't want to end up with a property that is too difficult to sell at a profit," says Heller. "You need to make sure that you understand the issues and get enough of a discount when you buy, so that you can address the problems and still profit when you sell. If that just isn't the case, it may be in your best interests to move on to the next property."

5. Unexpected costs could ruin your profits.

To ensure there are no surprises when the property becomes yours, make an appointment with an inspector while the contract is being finalized. The inspection report will spell out problems with the property that you're already aware of, but occasionally it will inform you about a new problem. This process helps ensure that you identify and assess all problems, understand repair costs, and line up workers to make the repairs.

Most importantly, it provides an opportunity to reopen negotiations and ask for additional discounts to cover unexpected repairs. When you bring these problems to the seller's attention, they may choose not to fix them, further discount the property, or compensate you in another way. In this case, unless there is still room under your maximum purchase price (the most an investor should pay for a property to obtain the appropriate profit) to cover these extra costs, you may have to walk away from the property."

1 comment:

Ralph Nudi said...

Great piece. As a real estate agent and investor myself, I come across novice investors all of the time who think they can apply the tactics learned on late night infomercials and "reality" shows and make bundles of money. I often have to reeducate them that investing in real estate is a long term process that takes staying power and the patience to find the right buys.
Fortunately I specialize in pre-foreclosure properties and can typically find 1-2 solid investments per month. Even in the cases of foreclosure properties, investors have to proceed with caution if they want to make out with good results.
Ralph D. Nudi
Weichert, Realtors - Unum Properties
Kenosha, WI