Episode 1606
The good the bad and the ugly of House Flipping
If you have turned on the home improvement tv channels for the last 5 to 10 years you have been seeing the massive amount of home flipping television shows and of course those stars pushing their own house flipping seminars where they sell you "their" plan of how to flip homes. Today we dive into the good, the bad, the ugly of house flipping and how things can go right or oh so wrong. Plus are there good house flippers? We talk about that as well. All this and more on this weeks first hour of Around the House Show1
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Transcript
[00:00:29] It's not going to be the same thing as what you got. Third year mortgage for your primary residence. So this is where you need to really, really pay attention to the market and demand and how long it takes to even a house to close. So, you know, this is much more complex than your traditional, uh, buy low, sell high kind of thing, because you need to figure out how this is going to lay out and, um, where your money's coming from.
[:[00:01:06] Welcome to the most out of your home through information and education. Thanks for joining us today. Well, I wanted to talk today about one of the kind of dirtiest little secrets out there that everybody seems to hammer on these people. But I thought, you know, it's a good time to show both sides of that coin today.
[:[00:01:52] So there's, there's multiple sides to this coin here. And I thought we'd talk about it. You know, uh, if you want to find out more about us, head over to [00:02:00] around the house, online. com. And you can send me a message there if you want to debate any of this. But, uh, my first rules here for house flipping is that.
[:[00:02:29] You now have. One of the nicer homes in the neighborhood. And you know, sometimes that can be very good for the house values around there as well. Now there's other people that will say that that same person is taking that house that could have been affordable for somebody and making it less affordable by, you know, making 30 percent on that house flip and turning it around.
[:[00:03:15] First off, don't fall for the famous TV home improvement celebrity trying to sell you a seminar. You know, there's so many people out there in the house flipping world on HDTV that are out there pitching their seminar of how you too can. You know, be a house flipper and make money. And a lot of times they're the ones making money off of you.
[:[00:03:52] And that's the one thing with house flipping is, especially in today's economy. It is sketchy because there are a lot of things that sneak up and can [00:04:00] cost you so much money that you could actually lose your own house just trying to gamble this other house. So it's, it's a business venture that takes a lot of effort.
[:[00:04:30] And, and I'll tell a story here of one that I'm still following on social media, but they took down the most offending posts 'cause everybody beat them up and these people actually bought. This house in Portland and decided to do a house flip on it. Now, it had, you know, engineered truss system up there and they wanted to make the ceiling.
[:[00:05:12] And in the video that they have since taken down off YouTube, you could see where things were just scabbed together with two by fours. And they thought they had the load calculated. And I don't even know how it was handling, holding up the sheet rock that was up there, let alone put somebody on a roof.
[:[00:05:44] And so there's a lot of those house flippers out there that are just not fixing things, right? They're covering up outlets, they're covering up stuff. They're just doing the cheapest thing. And it looks absolutely horrible. And for the potential homebuyer, this is where it gets bad is that they come moving [00:06:00] in.
[:[00:06:19] And I don't like seeing that because those people are basically criminals ripping off future homeowners and that is not the experience I want people to have with a house that they just bought and so it's something to think about What I want you to do if you're gonna get into looking at doing this is being a good steward to the house and not Taking advantage of new homebuyers that are out there trying to afford a place that they love.
[:[00:07:29] These are all absolutely crazy costs if things don't go correctly. And there's things you need to pay attention to, like the cost of money. And that's where you get into it. I mean, you think about house flipping costs that you see out there, right? So you got to buy the house, you got to pay the commissions on the real estate, the broker's fees, title search, owner's title, insurance, um, lenders, title, insurance, inspections, appraisals, any surveys, you know, all that [00:08:00] stuff.
[:[00:08:24] And so, you know, broker's fees, you know, a lot of these fees, you're talking about 300, 500, you know, maybe 800 bucks to a thousand bucks for title insurance, you know, all these different things, appraisals for 500 bucks, um, you know, any of these things. 6 percent of your selling cost is going to go back to the realtor.
[:[00:09:07] 000 bucks pretty quick. Most of the time it's four or five grand for that. And then some of the things that you have to be careful, and this is where it gets you is the What's it costing you on your lender? So you could be paying anywhere on the low end to 7. 5 percent, which I don't think you're probably getting to more reasonable out there 18 And that gets really expensive Really quickly.
[:[00:09:58] What's up? This is Dick [00:10:00] and Satchel from Steel Panther, and you are listening to Around the House with Eric G. Yeah, we love Eric G and you should too.
[:[00:10:43] Cause that's a big one. Cause if you've got a three month, six month project on this, you're carrying that loan, which means you're making payments and you're having to pay back on that high interest loan. Cause it's not going to be the same thing as what you got as a 30 year mortgage for your primary residence.
[:[00:11:19] And of course, how is this going to work? So, you know, you have to have property appreciating to make money in house flipping. So it has to be worth more when you're done. And it's interesting. I saw this happen down the street here on the way to my home center. There's a house that a guy built. He looked like he was the general contractor because he was living there in a trailer.
[:[00:11:57] So it gave an instant dated look. [00:12:00] And I think this is where you got to be really be careful. With having the wrong design talents in the process, because you want this to look better and to have a mass appeal. This house had 5 or 6 different competing styles, different colors. It's been on the market for probably 18 months, and they haven't sold it.
[:[00:12:48] So many times you see those end up going into foreclosures when they get that far out because There's no profit to be had and the market right now is not growing in my area at least where it should be So these are things [00:13:00] that get really expensive really quickly. So in that situation right there a proper building designer architect Designer could have made that project So much more because you know what their costs are on carrying that for so long and that is going to be super expensive Compared to maybe the five or 10, 000 they could have paid to get some architectural or design help along the way.
[:[00:13:49] Good design decisions and we see that all the time on the flip shows where ego gets involved and creates, you know, almost manufactured situations in some of the [00:14:00] television shows. And yes, are some of those house flip shows like zombie house flipping and stuff. Yeah, a lot of those are very well scripted and they create some of the drama because if they don't have the drama, it's a really boring show.
[:[00:14:40] So it's something to think about now if you're looking at a house and you're out there shopping around going Hey, this might be a good candidate Here's some of the things that you should be taking a look at one You know, you need to look at what the house value is now compared to what it should be You know, I mean, how [00:15:00] is that gonna look?
[:[00:15:20] Enough profit to cover for the cost of the project, you know, making a profit. Um, I think I saw that the average gross out of a flipper last year was about 68, 000 bucks, which for them nationally, if you look at that was about 26, 27 percent of that. And that's a 3 percent decrease from 2021, when flippers earned a little over 70, 000.
[:[00:16:11] So that's why the best flippers that go in there when they're looking at profits, time is on their side because they need to go and get it done as quickly as possible. And the problem is, is when you're doing something based on time, quality is Always when you're in a hurry, quality goes out the door, and that's where some of these problems are.
[:[00:16:53] And one of the other biggest things is that I've seen too, is people just not having the right skillset to do it. Right. [00:17:00] You know, uh, builders, professionals and, uh, project managers, these people have done this stuff for decades. And it's a learned trade, so they have to have it. You going in as a homeowner and not as a person in the trades, you have to learn all of these things yourself, all while every second is costing you money from the bank.
[:[00:17:47] And so that's, so they're not having to have all those carrying costs. So if they've got their own money, they can spend four to six months on it and get it really done and do it. Well, where people that have a [00:18:00] bank loan to do it, they're sitting there, they've got to turn it in 45 to 60 days. And time is not on their side because otherwise that starts costing them a ton of money.
[:[00:18:32] And so understanding that key piece right there is going to save you. Hundreds of thousands of dollars. If you want to do this right now, we come back. I've got some other tips for flipping houses, what to do and what not to do. Just assume it's around the house. Hey,[00:19:00]
[:[00:19:13] Welcome back to the around the house show. This is where we help you get the most out of your home through information and education. Thanks for joining us. We've been talking about the good, bad and the ugly about house flipping. And one of the best pieces of advice that I would give you right now is it is a very dangerous time to be doing this.
[:[00:19:49] Because this can really get expensive and you can get over your head very, very quickly. Now, you're seeing a lot of different [00:20:00] things out there when it comes to house flipping. And there's all these different sales techniques and flipping techniques that you can buy into. And like I said earlier, stay away from this stuff.
[:[00:20:32] I've even seen people do crowd. Funding and then of course, there's your typical homeowner live in flip where you're buying it and over 2 years or so, you're going to turn around and flip it and move to the next 1. that's a common 1 to do. And there's another 1 out there that I've seen too, which is a sale and lease back, which is an interesting as well.
[:[00:21:10] If you've said, okay, I got the money. I want to do this. Where do I go now? So I would start looking out there at the right homes that are good candidates. Maybe someone there had a hoarding disorder and there's so much junk there and people are selling it as is. Maybe someone passed away and it's a state sale or maybe it's a, uh, you know, a foreclosure or a bank loaned place.
[:[00:21:51] But those are really the good candidates because what you're trying to buy is a house that is the cheapest in the area with the [00:22:00] biggest upside, as well as. Where you can make those profits. So there's gotta be stuff that's easy to do and you have to have stuff. That's not super expensive. I mean, if you've got to go in there on a house flip and spend 70 grand on fixing a foundation and 40 grand on a roof, and you can get upside down where the work that you're going to pay it put out there versus the market price, isn't going to go and a great example.
[:[00:22:49] And the, the, they remodeled the kitchen. They put a new roof on it. It's got new bathrooms. They did a ton of work on it and it's on the sale. It's on sale for [00:23:00] 1. 2. So they spent probably 20 grand on this 30 grand. If they did it themselves, And they've got a lot of money tied up in this thing and they're hoping to sell it quickly.
[:[00:23:37] So you got to get the right house at the right time in the market. Right now, it seems in my area, the prices are going down a little bit, which means that you need to project out that those prices could even be down farther later on. Which means you're losing profit on every day that you're working on it.
[:[00:24:09] Oh, this bathroom's great. I'm like, oh, yeah, but what about all that black mold over there? Oh, they don't address it until later. They open it up and go. Oh my gosh, go to this black mold We didn't know about you knew about it, but these are the things that can really get you in trouble So I really want to forewarn you is that mold?
[:[00:25:02] And they come in and check that place out and poke around and do some tests, see what they need to do and pay somebody to find the issues because that's where it's going to get you. So now let's talk about the problems that you might have if you're looking to buy a house that's flipped. And these are some of the things that I see.
[:[00:25:48] And it's not going to last. And I've seen that so many times where that flooring is going to be good enough for three months, but by six months, you're thinking about replacing the flooring again. You just [00:26:00] paid for that. So these are all things that I want you to really pay attention to. Now, if there is a way, and I've done this in the past with homes that I've been purchasing.
[:[00:26:44] Like, if there was mold, was it abated? Was it a water leak? What happened? Where did this come from? And, uh, were there any foundation issues? All these different things that you can see sometimes, those will give you so much information because you're looking at it and going, Wow, there's the, there's the pictures [00:27:00] from 10 years ago.
[:[00:27:19] So, if you're the purchaser, spend the time, go back and look in the internet way back machine there in that internet way back machine and see what you can find as old pictures of that house. And one of the secrets that I do, if it's like, you know, if it's a go take a look at every single. Major real estate company, usually the one that lists it still if that agent was lazy still has the pictures up there and, uh, even though the listing got taken down, the pictures were still populated.
[:[00:28:10] The worst case scenario is you look at it going. Wow. I don't think they did that, right? There was asbestos flooring I don't think they took care of that. And now for you at purchasing a house, you need to start looking at and asking about, okay, um, I want air quality reports. I want to see if there's any other asbestos.
[:[00:28:41] It's the end of the[00:29:00]
[:[00:29:20] Um, it can be a little sketchy now I found something here during the commercial break that I wanted to talk about just kind of a side note of previous stuff home flipping returns by state. I found this over at the Motley Fool. And, um, there is some states. This has gone really well in and some not. So this is really something in the USA here.
[:[00:30:07] And this is where it gets interesting. So, um, flippers in Idaho had the worst house flipping. They're only knitted investors, 6.4% on average in 2022. Now, ROI, uh, your return on investment for House Flipping grew in just 5 states from 2021 to 2022, and our housing is much worse now, but you look back, Hawaii at 403, Mississippi 74%, Ohio 30.
[:[00:31:02] Is it worth it? Is that something that's going to make any sense, you know, and, and, and so just really take a look at that. That's a, that's a key number to take a look at is in your area. Can you even do this and expect to make money because it all comes down to it is, uh, your cost of buying things, your cost or renovating things.
[:[00:31:42] Um, I want you if you look at it and go, okay, this was a flipper. I'll be honest. I want you to have 2 different home inspectors take a look at it. And make sure everything was done. I also want you to look and see if somebody pulled building permits, if they needed building permits in your area, which most states do [00:32:00] not all, but most states do.
[:[00:32:27] And you are trying to buy it. And that's a big one. So understanding the history of the home is a key. Now, I don't want to see you blowing money on this that you don't need to blow because Right now, I think you're going to see some desperate house flippers out there with the market because they're trying to get things sold quickly and in some areas, like I said, you've got 30, 60, 90 days before the house is even sold.
[:[00:33:12] That's where it gets much worse. So now let's talk about the bad side of house flipping in that from the person that is trying to buy an affordable housing house. And so what you're seeing is, for instance, if someone was buying a inexpensive home. And I'll just use some generic numbers here so you can do it.
[:[00:34:17] As far as something that's affordable now, what the other thing you're seeing though, too, is that sometimes these homes were the blights of the neighborhood. And so maybe that was just going to, you know, let it continue to be a blight because people were just getting into it and I couldn't afford to fix anything up to it.
[:[00:34:58] And so there's really kind of a [00:35:00] double edged sword with house flipping that if you have too much of it going on. That you're now are pricing people out of entry level homes that maybe one day they hope to fix up. And that's the challenge, right? Is that are we taking homes away from homeowners that just want to get in there and they don't care that, uh, it needs some coats of paint or the cabinets are oak and nobody cares about that.
[:[00:35:43] And so, no, I don't think we need to have more regulation. We don't need to have more stuff because that just makes things more expensive. But I think though that we do need to have some balance with house flippers up there as well. Is that, um, you know, by taking that and artificially marking that [00:36:00] house up even more.
[:[00:36:26] is trying to, uh, create, um, or limit house flipping. So, um, they're talking about doing an anti speculation tax that would create a disincentive for property flipping. Uh, and then of course, being a tax, that means that they can spend the money on something else. So they might spend that money on like foreclosure prevention, house repair, energy efficiency, those kinds of things.
[:[00:37:13] And some of that is we've talked about in future and past episodes. We'll talk about it again at some point, but really trying to create something that is affordable for most people can be tough out there. And it's even worse when the government gets involved and decides that they're going to be house builders because they are not house builders.
[:[00:37:59] So. [00:38:00] Let's make sure that we are doing some balance here. And I know house flippers out there that are listening to the show right now are going Nope, I want to do my thing and I totally get it. But I also think we need to have some some some places there where we we leave homes that can be purchased for lower income people and That that need it so they're not in the apartment or something like this.
[:[00:38:48] However, I'm trying to make sure that we have balance for those families that are trying to move into their 1st host house that they bought and that they can do something with. And have that American dream where they could actually [00:39:00] buy a place and, uh, benefit from it appreciating in value. All right guys, we're out of time.
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