I was watching the news the other day and there was a segment on flipping houses. The reporter was interviewing three people who had decided to buy a distressed house together and fix it up on their own with the intention of reselling it. As they walked thru the nicely updated and repaired home, they began to answer some questions.
‘What made you decide to try your hand at flipping a house?’ After watching the many shows on TV about the success and ease of flipping and the profits that could be made, these three thought it looked easy enough and something they could take on themselves.
‘What kind of shape was this house in when you bought it?” Terrible. Floors were sagging, windows broken, walls damaged – among some of the remarks made.
‘How much did you pay for the house?’ $150,000. Now, we must take into consideration the location of this house – they were clearly in a different market than the one we have here in Bennington County. Apparently $150k was a bargain.
As they began describing their efforts to rehab this house, it became clear to them early on that they really did not fully understand what they were getting themselves into but they learned as they went along and in the end produced a very nice product. If I remember correctly, besides their own labor, they put in about $60,000 in materials for this $150,000 house.
Finally it was time to list the house for sale and reap the rewards. They hired a Realtor and listed the house for $275,000. I remind you again, that location, location, location is important to consider when looking at these prices and I’m presuming their Realtor helped them price their home competitively to their market. These three had high hopes, though and just knew this house would sell quickly. They held an Open House and had a number of people come thru – but no offers. They were sure that this house would sell in thirty days. Funny, I always hope for the same thing!!
Anyway, about five or six months later and a reduction or two in the price, they finally went under contract and were expecting to close at a price of $235,000. Much less than they had anticipated and with profits split three ways, sure makes all that hard work seem harder.
Was this a bad investment for those three? Not necessarily. Maybe it wasn’t quite the rate of return they had expected but at almost 12%, that’s a lot more than I see in a savings account or CD now a days.
What they gained in experience and knowledge has given those three a new prospective and understanding in the business of flipping. Not all of these endeavors are successful either. Sometimes you win, sometimes you lose and you have to be financially solvent enough to absorb the loss and continue to the next project.
Flipping is not for the faint of heart either. These houses are generally ones that have been foreclosed on and typically when someone is forced to leave their home, they aren’t happy about it. They may have even walked away without telling anyone – namely the bank. Think about that for a minute. If someone were to leave a house around here in the winter, probably have already canceled their electric service, certainly aren’t going to continue to buy fuel oil for a home they don’t live in, the heat goes out, the temperatures drop, it gets mighty cold in that house – well, you get the picture.
When buying one of these properties, you are buying ‘as is’ and they mean it. There will be no way for you to know up front just how many pipes might be broken, if the furnace works at all, what kind of damage was done by water, the cold temperatures and just plain neglect. Do your homework. Talk to your favorite Realtor to help you determine what price these distressed homes are selling for and what you might expect to be able to sell it for in the future. Do you have the cash to buy a property such as this? Do you have the funds to fix it up? Are you anticipating unexpected costs? Have you talked to your local bank to ask if they would consider financing a project such as this? Many won’t.
Most buyers of these types of homes are cash buyers and they make their offers with no expectations of a property inspection. They know what they are getting themselves into. Do you??