When exploring options for dealing with a fixer-upper home, owners will likely consider the fix and flip strategy. With popular reality television shows making the practice seem easy and the possibility of high profits motivating owners, it’s not hard to imagine how the fix and flip strategy seems like an enticing option.
While the fix and flip strategy can be profitable, the reality of the challenges and risks involved need to be carefully considered. Basically, the practice is harder than it looks on television and riskier than homeowners and investors may think. In an effort to help, let’s discuss 3 reasons to reconsider the fix and flip strategy.
1. Steep Learning Curve for First Time House Flippers:
Learning the ropes with fixing and flipping a home is much like that of starting a new career. The learning curve is steep and requires commitment, time, investment, and a desire to learn about real estate, contractors, law, marketing, building codes, taxes, and more.
Basically, this isn’t a strategy for those who want an easy way to deal with an existing home or an easy way to make money from an investment. Unless a person wants to make this strategy part of their real estate investment career and is willing to learn the ropes, the fix and flip strategy isn’t likely for them.
An article found on The Washington Post called: “Why you won’t get rich flipping homes”, written by Justin Pierce, explains how the fix and flip strategy is “Knowledge-intensive”:
“You have to know at least a little about a lot of different things to be able to manage the business. In my opinion, the most important knowledge required is real estate market specifics. You absolutely have to know how to value a home and what the buyers want, which includes popular designs and decor.
…it’s very tough to be successful in this business if you don’t have a good understanding of construction, which includes the dozens of specific trades required in building a home.
…you also need to know real estate and business law, insurance, contracting, negotiations, project management and more.”
2. Large Investment Needed with Unknown Return:
One of the biggest misconceptions about house flipping is the profit margins, at least for beginners. The truth is the fix and flip strategy requires a large investment and doesn’t guarantee a profit in the end. This is especially true with beginners who haven’t calculated the comprehensive expenses involved from start to finish.
The Washington Post article mentioned before explains more:
“Flipping a home is a costly endeavor. It involves the input of dozens of specialists, all of whom have to be paid. No one can do all of this alone. Even if you could, it probably wouldn’t be the best use of your time.
…There are a lot of people between my final paycheck and me.
…I have to pay my lenders and investors for the use of their money.
…I have to pay the agent who brings me a buyer.
…I also have to pay lawyers, contractors, material suppliers, inspectors and appraisers. And the tax man gets me about three to five different times for the same deal.”
The author, who’s also a licensed real estate agent, goes on to explain the slim profit margins involved with flipping houses:
“Sure, I might make a $40,000 profit on a project, but that is a really low return if I had to spend $600,000 on it.
…Despite what the gurus tell you, this is a very high-risk business, especially for those who are new. You have to rely on a lot of other people. The biggest risks are in valuing the property, determining the renovations and managing the construction.”
3. The Amount of Time and Effort Needed to Flip a Home:
The fix and flip strategy can work, yet owners must be willing to take the time and expend the effort necessary to make a decent profit. How much effort and time it takes to do this highly depends on the specific variables involved; often for beginners, the entire process takes longer and requires more effort than originally expected.
There are many hindering factors that can derail ideal fix and flip scenarios, such as:
- legal issues
- contractor issues
- real estate market demand
- inaccurate valuations
- unexpected repairs
- code issues
There are many nightmare fix and flip stories that validate this point; one such story is told by an experienced real estate investor and house flipper Mark Ferguson on his website Invest Four More in an article called: “My Five Worst House Flipping Experiences”:
“A couple of years ago, I bought a house that was in really bad condition…I bought the house on 4/28/14 and sold it on 2/26/16!”
…Time dragged on and on, and the work was not getting done. The contractor had a number of excuses, but then I made a huge mistake. I paid him a partial payment for the work he had done, and then my bookkeeper paid him again because I forgot to write ‘paid’ on the invoice. He got paid in full for the job before he was done. After that, he would almost never work, and I had to threaten to sue him multiple times to get anything done. In the end, he finished the work, but it took him almost a year!”
This is a good example of the type of delays and hindrances owners may face when flipping a house. This story was due to contractor issues, both with trying to find one and then trying to get the one hired to do the work. These aren’t the type of variables owners plan on dealing with, yet they can happen to even experienced house flippers.
While the fix and flip strategy can be profitable, owners and investors should carefully consider the challenges and risks involved. At the very least, they should expect it to be more difficult than popular reality television shows make it seem. In reality, the fix and flip strategy involves a steep learning curve, the ability to stay committed through delays and hindrances, and the willingness to risk a large investment for an unknown return.
Basically, the fix and flip strategy isn’t suited for everyone and every situation. For situations where homeowners want to sell quickly for cash as is, finding a reputable service to deal with is key. Dealing with a reputable service like Seller’s Advantage ensures homeowners get the best price in the quickest time frame.
If interested in learning more please contact Seller’s Advantage online or call us at 1-800-208-3243 to get a no-cost, no-obligation quote on your home. We purchase homes in AS-IS condition and can give you a cash offer in as little as 24 hours.