On the surface, flipping houses looks easy. If you are judging by all the popular TV shows like Flip or Flop, Fixer Upper, Property Brothers: Buying and Selling, Rehab Addict and more. However that is not always the case.
The entral theme of these shows is, the investor buys a house just needs to buy a house. Then make a few cosmetic fixes, make a few repairs, put it back on the market, and then make a huge profit. Occasionally they have a dramatic “uh oh, we ran into a huge problem”, but that problem is usually only a few thousand dollars in repairs.
And while it certainly is possible to make a profit out of this investment, it is not a walk in the park. Once you take a closer look at the whole process, you will see all the little details that can make house flipping a very challenging endeavor. Flipping can actually lead to failure of investment.
House flipping is associated with short term profit with less effort. But the truth is that if it is not done correctly, it can be an investment failure. So many things could go wrong at any given point in time that even experts sometimes fail and end up losing money.
Recognizing the Problems that Lead to Investment Failure
The best way to avoid investment failure is to recognize why many people fail to flip houses properly. Identifying these problems can help investors create a clearly defined approach. Newer investors don’t have the luxury of experience and familiarity: therefore they do not have an exit strategy to speak of.
But for anyone who wants to take house flipping seriously and use it as a reliable stream of income, they have to know what to look out for.
According to Investopedia, there are five main reasons why people run into problems while flipping properties: not enough money, not enough time, not enough skills, not enough knowledge, and not enough patience.
Investments fail when the investor is not financially solvent with cash assets. Dabbling in real estate is an expensive hobby. The investor needs to be fully committed—and they need the resources in order to do so. They also need to know what to do with that money and what to invest it on. House flipping is also a time-consuming venture. It can take months to find and buy the right property. Even when the property is bought, you will need to invest time and money to fix it up.
Some investors are skilled professionals such as carpenters and plumbers who flip houses as a side income to their regular jobs. This makes it easier for them to find and fix a house. And finally, experience is another important factor, because professionals take their time and wait for the right property.
Novices rush out to buy the first house that they see and then hire a contractor to address the work they can’t do themselves. It’s a very risky approach that hardly ever pays off. Professionals either do it themselves or rely on a network of pre-arranged contractors.
Why Professional Flippers and Successful Realtors Experience Investment Failure
HGTV reality series Flip or Flop effectively demonstrates how even professional real estate agents and house flippers can sometimes get things wrong and lose money in the process.
Real estate agents Tarek and Christina El Moussa hosted their own TV show for almost nine seasons. So it is safe to say they have plenty of experience when it comes to flipping houses. But they have also experienced investment failure—granted it has only happened once so far throughout the show’s run.
TheWrap reports: “On the series’ 38th overall episode titled “Big Lot, Little Flip,” the El Moussas ended up taking a $3,300 bath on a project lead by contractor Jeff Lawrence.”
The pair purchased that particular property for $272,000. While the house itself was small and rundown, the land was spacious and had plenty of potential for the realtors-turned-flippers.
“Unfortunately, the El Moussas ended up putting a whopping $105,000 into the project, blowing way past their budget when issues arose. Unfortunately, their closing costs of $26,000 coupled with a $400,000 sales price dropped the duo into the red.”
Commercial real estate agent Sterling White agreed that investors may lose money on house flips due to tax and other issues. In his blog post, White claimed that he will never fix and flip houses again.
“New data from ATTOM, the leading provider of real estate and property data, shows that many are losing money, too,” White said. “The latest Home Flipping Report reveals that average house flip profits are declining. The number of flippers using cash has also dropped to an eight-year low. RealtyTrac says that 21% of transactions show a gross profit of less than 10%. That means once all numbers are added up, these deals likely lost money. That’s in addition to 8% of flips that sold for less than the property was purchased for.”
House flipping is a serious endeavor that can pay off if done properly. In order to avoid investment failure, new investors should take the time to do their research, make sure that their resources and skills are enough, and follow real estate trend.