Realty Insider Blog

Making a quick buck flipping homes may seem easy on TV, but in real life things get more complicated. The Washington Post recently ran a story (Link to Article) about a young couple that purchased a home in NW DC - needless to say they got more things to fix than they bargained for.

Anyways, I often get inquiries from buyers looking for a good fixer upper. They do exist, and there are people making a decent living in the slow market we are in. Locating these properties at a good price is getting harder and harder with the prevalence of programs like "Flip That House."

My main issue with "Flip that House" is that is creates an unrealistic profit expectation and downplays the amount of work and effort actually involved. The story typically goes something like this:

Jill and Joe bought a fixer upper at $500,000. They spent 4 weeks and $50,000 to update/change the kitchen, living/dining, master bathroom, master bedroom and the outside. They then get an "appraisal" from a real estate agent, usually at about $700,000 or so. As they love to stress in the program, the potential profit is $150,000 in this case! Wow, sounds great. 4 weeks of work = $150,000 potential profit!!!

Well, there are numerous problems with the story:

1) Real Estate agents are not usually appraisers. An appraiser is unlikely to value the improvements of the home at much more than the actual cost of the improvements. An appraisal at $200,000 extra for some bathroom and kitchen upgrades that costs $50,000 is very unlikely – appraisers usually are very good at what they do.

2) The potential profit does not account for any additional and likely expenses (for the example above):
Initial settlement cost: $10,000
Carrying Cost I: $5,000 (construction)
Carrying Cost II: $10,000 (60 days to sell)
Agent Commission: $35,000 (assuming avg 5%)
Closing Cost: $7,000

So, that reduces the "potential profit" from $150,000 to $83,000. We then have to subtract the short term federal and state capital gains tax. Would be 25% federal + 5% state (VA), so we are left with $58,100 potential profit (flippers are unlikely to be able to use a 1031 exchange.)

3) It is unlikely that the flippers will get the asking price in most markets these days. Even if they do I suspect most lenders will be weary of an appreciation of 40% over a month and with just cosmetic improvements. That $58,100 profit will diminish very quickly with a carrying cost of $5,000.

So what is my point? Flipping homes is a risky business and the transaction and carrying cost will in most cases make it very hard to make a profit by just doing cosmetic repairs. Adding bathrooms and expanding a home does add value and can make you money. But, unless you are some kind of contractor with the right skills, contacts and equipment you will be unlikely to make enough money for it to be worth the risk.

For the average homebuyer wanting to make money, serial flipping every two years and fixing the home up while living in it will have the best chance of success.

The rapid appreciation over the last years made many ordinary people with minimal skills into “flipping geniuses.” With the market appreciating 20-30% per year, pretty much anyone with access to credit would make money. We are now back to basics where you must add real value to make real money.

There are compassionate professionals on “Flip that House” that goes into a challenged neighborhood and truly does a remarkable job on horrendous homes. They have a community connection and help working class people get into wonderful and affordable homes.