Wednesday, May 28, 2008

Will Flipping Homes Make You Rich?

I'm sure by now most of my readers know what home flipping is but for those that don't I will give a brief explanation. A home flipper will purchase a home that is about to enter foreclosure for a cheap price, invest in making necessary repairs and upgrades and get the home back on market and hopefully sold as fast as possible for a profit.

This concept is not new but is becoming increasingly popular and to those that perfect the method, it is nothing to see a 40-50 thousand dollar profit in a short period of time. This is also becoming increasingly more risky for the investors that don't have the funds to ride out this current real estate market.As many would be flippers soon realize, only on television do homes sell in the first week on the market. First time home flippers are also more prone to miss huge repair items that eat away at the potential profit even before the home is flipped.

Being a contractor and having a brother that is also a contractor, I have done the math and can not for the life of me see why anyone in the world would ever flip a home. Why would anyone ever undertake fixing up a structure that they had to hope and pray did not produce hidden problems half way through the process? Before any of my more intelligent readers begin to point out the 40-50 thousand dollar profit as the answer I want them to first research how much money actually goes into building a home. In 1998, My brother and I were hired to build my uncles home on an acre of land he had purchased for $6000. The total cost for materials and labor came to right at $45,000. For a total of $51,000 ( $6,000 + $45,000) he received a four Bedroom home that appraised at $220,000, even in todays market it still appraises at $175,000.

If my uncle were to have purchased that home via bank mortgage, he would have not only spent decades in debt but would have paid an additional $169,000. If he were to have sold the home as soon as it were finished he could have priced it at $220,000 (fair market value for that time) and seen a potential profit of $169,000. That 40-50 thousand dollar profit looks kind of small now, huh?

Flipping homes may or may not make you rich, for many it leads to nothing but bankruptcy.As for me, I will save my money, purchase land and then pay cash to have a home built on it. Paying cash will allow me to hold on to the home until I get the price I seek, I will never see my profit line decrease due to mortgage payments and I will never deal with hidden problems a previous owner did not know about or failed to disclose.

I wish all the would be home flippers luck in their endeavors however there is a better plan. It has been used by land developers for as long as banks have held mortgages and whether you use it for your own home or simply as a way to gain wealth, it will work for you too. The profit margin is higher (banks gotta have some reason to hold mortgages)and the risk is lower.

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1 comment:

The Commentator said...

Great post. I have embarked on a construction journey. My brother-in-law and brother are contractors and we've decided to enter the home-building world. Long story why I got involved but it has something to do with my parents. I'll end it there.

Our first home (on a 10 000 sq.ft lot and 2300 sq. ft of living space) was a big first project and financed by part cash and a line of credit.

As I said, I was in with experts so the actual building process was a cinch and a breeze but for unforeseen problems (a partner not forking over his share which left us scrambling) it took four months more to build and this cost us (I estimate) at least $20 000.

Nevertheless, we turned a profit but it could have got tricky since the interest alone (and other expenses) could have eaten our profits if we sat on it.

In this way, we had no leverage to sit on a property for the price we wanted (coupled with a slight slowdown in housing starts).

All in all we did very well but feel we could have sold for more. It was a learning curve but we will not stop here. However, we decided to build on a smaller scale but higher volume.

My brother-in-law also does renovations - this does better than flipping for him. He used to build and flip rather than buy shacks and rebuild them. Like you said, that's tricky from what I hear.