Washington - If you're among the many people who watch
television programs such as "Flip or Flop" or "Flipping the
Block" and think you can become a master flipper yourself, you're not
alone.
The frenzy for flipping - which refers to homes that have
been purchased and sold within one year - echoes the height of the housing
bubble before it burst, but most industry experts say the market dynamics are
different this time.
"The housing market is in full boom mode, with
prices up and homes selling quickly and consistently, which gives flippers more
confidence to jump into the market," says Daren Blomquist, senior vice
president of ATTOM Data Solutions, an Irvine, California-based property data
firm. "At the same time, they don't have to compete against a flood of new
construction like they did during the last spike in flipping in 2005-2006, when
home builders were building like crazy."
Blomquist says today's flippers often go into older neighbourhoods
and create like-new houses that serve buyers who might prefer to purchase a new
house but cannot find one in their price range.
After the housing bubble burst, investors were purchasing
distressed properties and foreclosures, and holding them for rental income and
to wait for their value to increase. Rising housing prices and low inventory in
recent years have shifted the priorities of real estate investors.
"About a year or so ago, we saw that investors
purchasing property on Auction.com flipped from holding their properties to
flipping them in the majority of markets," says Rick Sharga, chief
marketing officer of Ten-X, an online real estate marketplace that owns
Auction.com, in Irvine, California. "While these investors can sell their
property within three or four months, the investment return isn't quite as high
as it was during the housing bubble, depending on the cost of repairs."
Read also: S&P expects house prices to be stagnant
Another difference from the 2005-2006 flipping frenzy,
Blomquist says, is that loose lending drove that market at an even faster pace.
"It was easy to buy places without cash, so a lot of
flippers would buy places and not bother to fix them up," he says.
"They would use an exotic loan that required them to make almost no
payment at all and then just sell within six months for a profit."
Bad reputation
Flippers, particularly after the housing bubble burst,
sometimes have had a bad reputation as damaging neighbourhoods by driving up
prices too quickly and by forcing first-time buyers out of the market when they
can't compete for entry-level houses.
"A house that's been flipped sells on average for $60
000 more nationwide when it's been rehabbed," Blomquist says. "But we
see it as a problem only if flips become too big a part of the market, such as
more than 7 or 8 percent of all sales. Nationwide, flips were 5.1 percent of
all sales in the third quarter of 2016, but there are some markets, such as
Memphis, Tampa, Miami, Las Vegas, Phoenix, New Orleans and Mobile that are
getting near or above that danger zone of more than 8 percent."
Nationally, the initial purchase price for more than 50
percent of flips is in the $100 000 to $300 000 price range, says Blomquist,
which disproportionately hurts first-time buyers.
However, he says that some of the houses that are flipped
wouldn't appeal to first-time buyers, anyway, because of the level of work
required. But about a third of all flipped homes sold for cash in 2016 after
they were renovated, which typically indicates that the property was purchased
by an investor who wants to own a ready-to-rent property for the long-term
income.
Sharga says that flippers can add value to a neighbourhood
when they buy a distressed property that a first-time buyer wouldn't
necessarily want and that could be impossible to finance conventionally because
of its condition.
"They take inventory that's not ready and make it
available for buyers," Sharga says. "They're not selling them for
prices above the local market, either, because they want to be able to sell
quickly to move on to their next project."
Individual
investors
The vast majority of flippers are individual investors
who flip houses for a living rather than large-scale developers, Sharga says.
"The smallest investors flip a handful of homes each
year and do the work themselves, while the larger ones have a network of real
estate agents to identify deals and contractors to do the work," Sharga
says.
Fans of HGTV shows may see flipping as something fun and
a relatively easy way to make a profit, but experienced flippers warn that's
not as easy as it looks.
"The biggest hurdle for a novice or a pro is that
you need a mastery of your budget for each project," says Leslie Suarez, a
real estate agent with Evers and Company Real Estate in Washington. "For
instance, if you buy a rowhouse . . . for $400 000 and think you can sell it
for $700 000, it sounds like an easy profit. But you have to account for the
cost of repairs, interest payments on your loan, property taxes and utilities
for six to nine months or a year. Plus, you need an extra 10 percent of your
budget to pay for unknown problems."
Allen Shayanfekr, chief executive and co-founder of
Sharestates, an online real estate investing platform, in Great Neck, New York,
says people who do this as a career flip five to 10 houses a year and have an
architect, a lawyer, contractors and subcontractors on standby so they can work
on every project together.
Read also: Modest house price rise hope
"Professionals are good accepting it if they made a
mistake and their profit is smaller than anticipated, because they want to
start on their next flip," Suarez says. "Novices get tied up in a
piece of property and don't want to drop the price or move on because they were
counting on a $70 000 profit instead of a $45 000 profit."
Beginners tend to overpay for the property and
underestimate repair costs, Sharga says.
Finding a house to flip is the biggest challenge,
particularly in markets with low inventory.
"The best opportunities are not found; they are
created," says Scott McGillivray, host of HGTV's "Income
Property" and "Flipping the Block" and a spokesperson for
Owners.com, an online real estate brokerage. "I probably make 10 offers
for every one that's accepted, because I know if I pay market price for a property
there won't be enough profit at the end. What's nice is that unlike when you're
buying your own house, you're never desperate as an investor. You can walk away
if the price is too high."
McGillivray says investors should look outside the hot
areas to find properties and not be afraid to knock on doors and investigate to
find out the owners of abandoned properties.
"We find some properties on the multiple-listing
service, some by networking with other agents, and some we find before they are
on the market just by talking to people," says Ati Williams, co-owner of
real estate brokerage DC Home Buzz with her husband, Rob Williams, and hosts of
the HGTV pilot show "DC Flippers."
Cash was king
A decade ago, only 35 percent of flippers paid cash for
their properties because mortgages were easily available, Blomquist says. In
2016, about 68 percent of flippers paid cash, but Blomquist says that is an
eight-year low, as more investors opt to finance the purchase.
While a handful of community banks loan money to flippers,
Sharga says, most investors turn to what are known as "hard money"
lenders, which are individuals or small companies that specialize in making
short-term loans, such as a one-year term at higher interest rates. Typically,
these are local companies that know the real estate market and property values
well and will cap the amount they will lend so they will be able to recoup the
money if the borrower defaults on the loan. Sharga says they often require a
down payment of 25 to 30 percent.
Rob Williams says they put a little of their own cash in
each flip and then finance the rest with a hard money lender. He says that
sometimes a community bank such as Eagle Bank will finance their larger
projects.
Recently, Blomquist says, a new industry of companies has
started up to provide capital to real estate investors. For example,
Sharestates has investors from 30 states who fund real estate investments in 10
states and the District of Columbia.
Shayanfekr says Sharestates lends 40 to 50 percent up to
a maximum of 80 percent of the purchase price with mortgage rates of 9 to 12
percent. The loans require interest-only payments with a balloon payment due in
12 months.
"We focus most on the loan-to-value and the
borrower's experience in their local market with flipping houses,"
Shayanfekr says. "We also look at the market to estimate the borrower's
ability to sell the property and check the borrower's credit, especially for
foreclosures or delinquencies."
Opportunities
While there are opportunities everywhere to flip houses,
McGillivray says that it's best to look for a distressed property to have an
opportunity to increase value quickly.
"Make sure you have enough of a profit margin to
cover all the costs, especially the transaction costs," McGillivray says.
"You can reduce some of those costs by selling your property with an
online brokerage and sometimes get a rebate if you buy the property that way,
too."
McGillivray says the "sweet spot" to achieve
the fastest and simplest returns is finding a property that needs an intermediate
level of work such as a new kitchen, new floors, new fixtures and painting
rather than a complete gutting.
"I'd recommend that people start with their primary
residence, because you can build personal wealth by renovating your own home
and selling it before you go on to the next project," McGillivray says.
"Your risk factor goes down significantly because you need a place to live
anyway."
Ati Williams did just that. She started by renovating and
selling her own house for a $30,000 profit.
"You need to go through the process of getting
permits, creating a budget, getting bids and working with contractors before
you know if you're ready to do it as an investment," she says.
McGillivray says flips usually take six to eight months
if everything goes smoothly. He says that in recent years he finds that he
makes the biggest profit by holding onto a flip and renting it after a
renovation for three to five years, which technically isn't a flip. For
example, a house he bought five years ago in Tampa for $150,000 and spent
$40,000 renovating could have sold immediately for $250 000. He chose to keep
it as a rental property and recently sold it for $400,000.
"If you plan to flip as soon as possible rather than
rent your property, your biggest enemy is time," McGillivray says.
"The longer you hold it, the more money you're spending."
In addition to evaluating the costs and profitability of
a flip, McGillivray says novice flippers need to be careful not to take on
projects that are beyond their expertise.
"Start with something simple, even if the profit is
lower, to gain experience," he says. "Pick one or two things you can
do yourself for a good return on your investment, such as selling it on your
own or painting."
To be successful, says Rob Williams, you need detailed
market knowledge so you know whether something is a good deal. And you need to
visit the job site daily for quality control.
"On your first flip, the more work you can do
yourself, the better you'll do financially," Rob Williams says. "At
first it's best to take on properties that just need cosmetic work, but as you
gain more experience, there's opportunity for more profit if you take on a
place that's in worse condition and needs to be completely overhauled."
Ati Williams says that flipping can be lucrative, but she
warns that it's not easy to find the right property or to go through the
renovation process. And, when you finish, selling it at the price you want
isn't a given.
What you should
know:
Here are a few things you should know about it before
making that move:
- Work with a knowledgeable real estate agent who can
help you identify potential properties to flip.
- Do your own digging for deals.
- Focus on getting a low purchase price for a property to
increase profitability.
- Choose a property close to home - especially if you
plan to do some of the work yourself.
- Make sure you evaluate the work required to make the
property livable.
- Aim for cosmetic fixes such as updating the kitchen,
bathroom and floors rather than structural repairs to maximize profitability.
- Have reliable contractors and subcontractors lined up
before you make a purchase to avoid delays.
- Consider hiring a permit expediter to shorten the time
spent obtaining permits
- Do your math to make sure the transaction is
worthwhile. You'll need to know the purchase price, the cost of renovations,
carrying costs while you own the property, sales commission costs, an estimate
of the sales price and to have some wiggle room for unexpected issues.
- Have cash reserves available in case problems arise or
you can't sell as quickly as planned.