Our daily paper from Sarasota led this week's real estate “buzz” page with a item on flipping homes. The headline read “Investor Makes A Quick $262,200. Not bad—I know you will agree—heck, I'd like to make a quick $200K. And if he can do it, you and I can do it too—don't you think?
Looking a little closer at his transactions, Ed Thornburg bought a house in Bradenton, for $160,500. He bought a condo in Sarasota for $22,100; he bought a house in Palmetto for $26, 100; and he bought another house in Palmetto for $98,800; and finally, he bought a house in Bradenton for $269,900
His purchases add up to $577,400, and he has since sold three of them for $262,200 more than he paid. (I think the ones he still owns are the one in Bradenton and one of the Palmetto houses. So even if he sits on these two homes through the balance of the year, he's only sitting on an investment which cost him $186,600.
But hold on a second, investors rarely pay cash for the homes they buy, maybe 20% down is all they lay out. On the return trip however, when they sell the homes, they get 100%. To make a simple example, if an investor buys a $100,000 house, he will have 20% down, plus some expenses of closing, insurance fix-up and the like, so think $20,000+/-. But when he sells the house for, let's say $150,000, he will have a net profit of $50,000 (and get his $20,000 back as well). So the guy who had $20,000 in July when he bought the house, now has $70,000. This of course ignores carrying costs, and other fees, including Realtor commissions, but in general you see why people think this is a great idea.
I would caution you about the late-night ads that will suggest you can make as much money on flipping one house as you have in the last year at your job. These TV gurus don't look or sound any smarter than you are and they say they're raking in the cash. Remember, they're selling books, not flipping homes.
Well, trust me--it's not as easy as it looks on TV. The price run-up of the past few years led thousands of people to reach the conclusion that flipping homes will make money for them. There is a boatload of competition out there, which means that the obvious deals (call them sugar plums) are gone in a heartbeat. The pros will tell you that they make their money on the front end by buying properties for at least 30% below market value. Finding those houses takes time and once you find them, you'll need to move fast. And no matter what the late-night gurus say about doing this with no money down, it just never works that way. That means you'll need access to cash to do the deal, not to mention the rehab.
Remember Richard C. Davis, owner of Charleston-based Trademark Properties, and creator and star of A&E's reality show, "Flip This House"? He says no one can watch his show and get the impression that this is an easy way to make a living. The show is now canceled—maybe it'll come back but flipping is not something that the public at large ought to do. In his original video series, Davis told the viewers not to try this at home. It's for trained professionals. You will lose money.
And there's a ton to learn:
- You'll need adequate savings to pay all the bills.
- Your hair will go gray while money is flying out the door for cabinetry, plumbers and plants.
- Keep track of your contract to purchase, if you don't close in a timely fashion, the sellers can keep your deposit money,
- Remember to pay the insurance, the utilities and the maintenance.
- Oh, and contractors won't renovate a house for free.
- You'll probably need to hold on to the house for at least three months because of Federal Housing Administration (FHA) anti-flipping regulations. Houses sold less than 90 days after they were purchased aren't eligible for FHA mortgage insurance; those sold between 91 and 180 days are OK but require an additional, independent appraisal to make sure the sales price is justified.
- Every day you own the house costs you money in interest, utilities, taxes and insurance.
- Taxes. Oh right! As far as the IRS is concerned, buying and selling real estate as an investment strategy and doing it as a business are two very different things. If you buy a house, fix it up and resell it while you're working another full-time job that provides the bulk of your income, that's an investment and the proceeds will be taxed as capital gains. So talk to a CPA.
So before you get “flipping-envy” remember guys like Edward Thornburg are few and far between—that's why his making any money flipping homes this year is news-worthy.
Dane Hahn is a real estate professional practicing in Florida and New Hampshire. You can reach him via firstname.lastname@example.org or http://www.danesellsflorida.com/