Is This Really a Good Time to Be A Flipper?

Posted by: Peter Coy on February 20, 2007

You don’t tug on Superman’s cape. You don’t spit into the wind. And you don’t try to flip houses when the market is going through its worst slump in a generation. Flipping—buying properties, fixing them up, and then putting them back up for sale—seems risky at best.

Or so you might think. Rick Villani and Clay Davis beg to differ. The authors are co-founders of HomeFixers, which bills itself as “North America’s leading real estate rehab franchise.” They insist that this is a perfectly fine time for flippers. They have just written a book called “Flip: How to Find, Fix, and Sell Houses for Profit.” It’s published by McGraw-Hill, which owns BusinessWeek.

Here is what the authors write:

Flipping works in any market. Why? Because it’s about following a process, and that process isn’t tied to any specific market or any particular time period. Your success in buying, fixing, and reselling houses comes primarily from finding value (buying a house below retail market value) and creating value (making improvements that increase the selling price beyond their cost). Finding and creating value always works whether your market is cold, lukewarm, or just plain hot.

That makes sense on one level. But it seems to me that a lot of people who got rich flipping houses in the past few years were more lucky than smart. They didn’t really find value, as Villani and Davis advise, and they didn’t create much value, either. They just rode prices upward, buying low and selling high. As somebody once said: Never confuse genius with a bull market.

Today, when prices are flat to falling, there’s a lot less margin for error in a flipping strategy. In fact, the authors understand the risks. From their glossary, page 376:

Flip and fall The unfortunate circumstance that occurs when you’re about to put a flip up for sale and the housing market tumbles below anyone’s expectations.

Reader Comments

Mark Norman

February 21, 2007 1:55 PM

Peter:

I can't honestly disagree with you completely because there are many circumstances that I know of where flippers didn't add value and were just lucky.

Yet I work closely with one individual who is very particular about what he buys to work on. He bought a home (in Brookfield, CT) for $580,000.

He put in about $60,000; lived in it for 10 months and I was able to sell it for $720,000. It was well priced for the market and there was no luck invovled.

I also know many flippers who are looking for that flippable home. They are very diligent about the process and know exactly when to walk and when to try.

Personally, I think that there are many homes that need considerable help. Should the current owners spent the money updating them (almost like flip their own homes) or sell them to someone who can flip them after giving them new life.

If you know the marketplace well enough; have access to tradespeople who work with you; and can do the flip in a reasonable time (where current market conditions don't change too drastically) you can be successful (and not just lucky).

Akbar Bhamani

February 22, 2007 8:52 AM

Peter,

There are different types of flippers, the 'speculative flipper'(SF) and the 'developer flipper'(DF), new definitions for better understanding in the difference between the two. This is definitely not the time for the SF.

A DF is 'in the business', as Rick and Clay make perfect sense about finding deals 'in any market', location wise or demand wise, properties that have upside potential. These properties DO need a lot more work than the SF is able and therefore willing to do.

Being in the business is lot more work then just being a 'flipper', like every Great Grandmother (Grandmothers are too active today) and her dog became 'Real Estate Investor Developer, even though the only work they did was sign the papers, twice.

I am glad that Great Grandma's have to take rest, and now the sellers are finally waking up and smelling the coffee, and learning about the real price of beans.

The DF's are flipping with joy.

Donald

February 22, 2007 11:02 AM

Most people want to do their own work anyway. I dont want some tacky neo designer junk some flipper picked out. I want a good price on a home that I can personalize with my own sweat equity. I want my home to make P&E sense, otherwise I am happy as a renter with other safe assets.

lizziebeth

February 22, 2007 11:12 AM

Hey Mark,

I've recently started watching those shows Flip that House, Property Ladder... As a consumer, I can look past the outdated appliances, carpet.... Thanks to these shows, the flipper population grew by leaps and bounds, causing the real estate mess we are now seeing. Also, thanks to these shows, most educated people would NEVER buy a flip! These folks come in do as fast a job as they can before the mortgage payment is due. The quality isn't there. Flippers aren't doing the sellers or the buyers a service. They were just following their greed! The days of flipping and profiting off real estate are over for quite some time!

KENNETH MAAS

February 22, 2007 11:22 AM

I believe a house purchased to "fix & flip" needs a reciepe:
1] Predict local demographic movement.
2] Maintain architectual/decorative mainstream style.
3] Acquisition costs 25%-30% below market; fix-up costs 8%-10% of purchase price.
4] Time to enter market: 45-60 days.
5] Negotiate sales price.
6] Lease purchase contract with purchaser.
Time/Acquisition costs are the failure factors of any real estate "flip % fix".

b00m

February 26, 2007 8:35 PM

A lot of good information!Thank you very much guys.
I'm new here ,and as i'm thinking to get into this kind of business in the future ,I'm doing my homework first by learning and then jumping into something like this.Most of the info regarding "flipping houses" comes from friendS or tv.I'm convinced though,that there is a lot more to it than being just speculative.It's part knowledge,relations,vision and a small amount of luck.Gotta have it! :)Right?

Alex Ben-Kori

May 5, 2007 4:50 AM

Hello Peter:
I concur-very much so- with your position that "flipping" is less a science and a predictable way to riches, than an up-and down process that involves a lot more dumb luck than many "pros" either want to admit, or even recognize. Markets rise and fall in mini-cycles in their mostly inevitable, inexorable rise over the long term. Flipping successfully is indeed predicated on buying low (very low, if at all possible), but the fact is most people who made a killing on one or several deals, did so because they bought at a low ebb, and, through no prescience or incredible, mythic, Trumpesque insight, sold at an auspicious time. Few investors, novice or sesoned, will tell you about the places they bought just before their local market took a downturn, or mere slowdown. And, hey, it happens...always. Flipping can be a goldmine, but it peters out, too.
That being said, the learned investor can always find a great deal (perhaps searching hundreds of homes and knocking on many doors). And it takes steadfast attention on the bottom line, which means finding the HIGHLY motivated seller who is consigned to their fate of bailing out at all costs. The investor has to assume the moral responsibility of taking most or all the equity in the property. That's business, but it isn't always easy, for people with a particularly strong moral code (a dying breed, for sure). Lots of investors are cold as ice. They may schmooze, but they don't care a whit for the people they buy from. Simple fact. Plenty are simply decent, hardworking and shrewd. Point is, it isn't an entirely pleasant business. You're dealing with real people, who have real problems, and their lives are in a tailspin while you're eyeballing their investment.
Beyond that, I'd say the best bet for a consistently successful fix/flip business, is either being a skilled craftsman, or being married to, or partnered with one. Relying on contractors and handymen to do all the tear-out/rebuild is a major pain & eats up a lot of the profits, even when the investor is savvy on estimating and organizing.
I can generally do a five-minute walkthrough of a house, plan the renovations and upgrades, estimate the total cost and time of repairs, marketing and financing, within 10% of the actual figures. But that doesn't mean I can drive a nail in straight, or do good tile work. When the flip market gets rife with competition, and sales are slow and low, it's usually the physical dynamos who keep their head above water. They are the types who know nothing but 80-hour work weeks, and doing carpentry or tile work in their investment house at 11PM, on top of finding the deals in the first place. A really organized team, with clearly delineated responsibilities is most desireable, but in the real world, when things get tight-and they WILL, the profits can evaporate quickly. Success can come to almost any sharp, hard worker, but in the end, it's the lean& mean, exceptionally hard-working multitasker that's most likely to succeed. Also, this is as crowded as the real estate brokerage business. Everybody seems to be dabbling in the field. When would-be investors contact prospective sellers, they're usually going to find that the seller has-or will soon be contacted, and hounded by- several, if not DOZENS of other investors. Many of the would-be buyers are hucksters and/or complete dilettantes, which makes the process difficult for everybody. Lastly, Remember, Hollywood is Hollywood...code for ILLUSION. TV shows , "reality" or not, are entertainement, designed to garner viewers, and to sell ad time, not ironically, in this case, for Home Depot and the like. TV made a veritable mania for thisfix/flip business. The unglanmorous truth-unfortunately lost even among many real estate and investment professionals- is that most deals just don't make a lot of sense. Books and seminars, likewise are a great way for authors and speakers to make money. They impart very, very little that common sense can't confirm or refute. The best seminar or book about real estate I can think of-the one that's most likely to make someone wealthy- is one titled "How to make a million dollars selling books and seminars about real estate."
Thanks

Isa

May 21, 2007 8:29 AM

Does anyone know of a "flipper" looking to buy in Sebring, Florida? I have a great house there and Im looking to sell. Started the renovation, just ran out of time. Its an income property too. 2bed 1.5 bath PLUS a duplex in the back.

Thanks

Isa

lama

May 22, 2007 8:47 AM

Isa,
A buyer will come along.
Can you wait 10 years?

lances_flooring

June 1, 2007 7:54 PM

Well i must say that flipping has made me a fortune in the upper northeast region. what seems to be the problem with people cracking on people wanting to buy a flip? Just buy low do good quality work throw a huge party when done together with an open house to freinds, family and neighbors and sell high, its simple.And i must say you have to have good people skills.

Jason

May 16, 2008 5:31 PM

I just found this post, but retrospectively; being a flipper in early '07 is better than one mid-year. Imagine being in this market right now and barely holding on to your property (if you're lucky). Time to look for alternatives like investing in stronger markets in Canada or in real estate investment alternatives like mortgage investment corporations.

The days of get rich quick schemes are gone.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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