If You Don’t Know What You’re Doing, Avoid House Flipping

John Burns Real Estate Consulting (JBREC), a big name in the commercial end of the housing industry, recently noted that rising borrowing costs pushed a lot of “fix-and-flippers,”—many inspired by reality TV shows on buying homes, fixing them up, and then selling them for a profit—out of the market.

The country goes through periods of this, and it gets dangerous for those who jump in if they don’t have some significant expertise in construction, investing, and real estate. (Even a company like Zillow got badly burned trying to do this.) As well as a lot of knowledge about marketing and finance. In the 1980s, there were people sure they’d make a killing, and a killing was had—of their financial situation, when general conditions cratered.

As JBREC noted, the increase of interest rates has meant extra expense that many of the small-time flippers haven’t been ready for. As one Atlanta-based flipper told them, “This is a much higher risk environment due to rising rates. Sellers still have not reset expectations from earlier this year, so acquisitions have essentially come to a halt.”

But it’s not just an issue of being in an unlucky time. Flipping houses is a lot harder than it sounds. During a craze of flipping back in 2016, an analysis by real estate information company RealtyTrac provided for an article I wrote for Money showed that 12% of flips sold break-even or at a loss and in 28%, the profit was less than 20% of the purchase price, and that’s pretty much the bottom line to cover rehab, financing, and other expenses.

A practicing flipper at the time said that the amount of margin you’d need going into a project was more like 30%. That means, by the time you sell, you should be getting on average 30% above the cost of the house, all the remodeling expenses, and the commercial financing charges (because this isn’t the normal home mortgage) that, interest only, could run 12% to 14%. And the country’s already above interest rates back then.

Managing a single project can take five to ten hours a week, which means you aren’t doing the work but paying someone else to. If you say to yourself, “it doesn’t look so hard,” splash some cold water on your face and look again. Contractors don’t dally about to take up time and charge more. Most are pushing to get projects done so they can get to the next one.

But this type of work is harder and more time-consuming that you’d realize. Just try something really simple in your own home, like replacing washers in a sink. After getting the specialty tools, learning how to do it, finding where the water shutoff is, it will still take more time to disassemble, figure out if there are any problems, correct them, and reassemble with the necessary new parts. And that’s about as easy as it’s going to get. You haven’t even started learning about building codes, permitting, and other things you might have to do.

Need to get a contractor, then? You’re about to learn what people in commercial real estate, including house building, have found, that construction labor is hard to come by. Year-over-year prices on construction materials—while having seen some relief with lumber prices having dropped to only high 2018 levels—are still growing at about 14% a year according to government figures. Supply chain problems continue with a large number of the components you might need.

And as someone who had done building trade work told Apartment Therapy last year, he gave up on flipping houses because he didn’t know anything about the real estate business or markets. For example, he did a project in a neighborhood that wasn’t considered hot, and even though the work came out well, it took time to sell. If you can’t reasonably well predict whether what you’re offering will pull in the money you need, whether it’s because of the location or what buyers at that moment seek, you’re depending on luck. That’s no way to run a business, which this has to be.

Finally, you need capital to keep yourself and your crews going, while maintaining the extra mortgage, insurance, and property taxes on the to-be-flipped house.

There are few, if any, easy roads to wealth or even extra money. They require effort and usually capital in addition.

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