From the Daily Breeze:
Can a house flip put you in the flophouse?
By Jim Woodard
House flipping has been an obsession for many people over the past few years — but no more.
Flipping is the practice of buying a residential property at a discounted price, sometimes enhancing it with quick and cheap cosmetic improvements, then selling it again at a much higher price, thus generating a fast profit. The practice was fueled by friend-to-friend stories about quick bucks made from flipping.
It became such a hot subject, network TV programs and “advertorial” features focused on the practice, creating even more hype. And a national franchise group was formed to assist flippers — for a fee, of course.
Flipping never worked successfully for many investors. They just didn’t have the real estate savvy to bring all the elements together productively.
Others did indeed make substantial profits when the market was booming. But today, the dynamics of the real estate market have drastically changed.
The demand for housing has dropped dramatically. The number of unsold resale homes on the market is at an all-time high. Prices are dropping while mortgage interest rates are slowly rising, despite periodic rate drops.
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Today’s market holds little potential for profit in flipping houses — particularly for those who invest their hard-earned savings and know little about complex property transactions and related negotiations. And if a broker is involved, his commission will take a big chunk out of any profits.“Flipping may look easy, fun and exciting on TV,” said Scott Frank, co-author of a new book on real estate investing. “But remember, TV is entertainment. The real world can be anything but. I’ve found that most of the time people who jump into flipping real estate based on TV programs or hearsay from friends never fully know what they are getting themselves into.
I mentioned about someone I know a while back. He thought he was going to make a lot of money by flipping houses.
He bought a house close to 3 years ago at $1.27M. Lived there for 2 years and no upgrade. $400K down and $870K at 1% Interest Only loan (negative amortization).
He put the house up for sale about a year ago at $1.87M. The price went from $1.87M to $1.77M, $1.67M, $1.57M.
I believe the house is finally in closing stage. I believe that the house was sold for between $1.3M-$1.4M. The house was empty for about a year now.
I guess he lost a bundle counting closing cost, empty for about a year, negative amortization, etc.
The TV shows like “Flip this House” and “Designers Challenge,” etc. are completely dishonest about the cost of home renovations. I saw a Designer’s Challenge enormous great room project where the budget was supposed to be $75,000 and I don’t think you could do the work they did for $250,000. They lowered a huge section of the concrete slab, probably 300 square feet, by 17 inches. And that section was probably only a quarter of the floor space of that great room.
These shows are fantasy.
Transactional cost in real estate are mighty pricey. Every greedy little thig has their hands in the process between the realtors builders mtg brokers appraisors lawyers landscapers they are all trying to pick pocket buyers.
The scum will will be mowed over in the next 12-36 months.
I’m not a flipper, but during the bubble mania in 2004, I bought a small house in Florida (1250 sq ft w/pool, 5 minutes from beach) for $300k with the thought it might be a good retirement place down the road. I rented it out for 14 months at a slight positive cash flow, but by 2005 I could see the writing on the wall. So I decided to sell it, and the tenant bought it for $400k. I had not added to it or upgraded. Crazy.
^^ Nice one Jay! And flood/hurricane insurance isn’t gonna get any cheaper. Sucks to be on a fixed-income in FL these days!