3 Reasons Why Flipping Houses Isn’t as Easy as TV Makes it Seem
Oh, if flipping homes were only as easy as the good-looking, seemingly impervious reality-show stars made it seem.
TV shows make it seem easy enough. A normal person like you or me cuts their teeth on their first rental property and then, dozens of investments and a streaming show later, they’re huge stars whose homes seem to follow the same progression: find it, buy it, contractors discover a problem and magically fix it, home is done, home sells.
The entire process can take as little as a couple of months and, with that as the standard, flipping homes seem pretty formulaic. Find the right contractors and the right homes and you’re good to go.
However, flipping a house is far from easy and is an industry shrouded in myths that tend to hide or smooth out the rough edges, leaving hazards hidden below the surface.
Myth 1: It’s Just Like it is on Reality Shows
I’ve watched my fair share of flipping episodes and I have to admit, the pros make it look pretty easy.
But be wary, says Nathaniel Butler of Washington Capital Partners; flipping homes is nothing like what you see on TV.
“They oversimplify the process and convey the message of, ‘Anyone can do it!’ In reality, it takes a seasoned flipper to navigate the process, avoid pitfalls, and make a serious profit on the back-end. Inexperienced flippers often take on projects that are more involved or expensive than they think, and struggle to break-even when it’s time to sell.” Butler said. “The point is: TV shows don’t give flipper guidance, just false confidence.”
In fact, Walnut Street Finance CEO Bobby Montagne said “reality” is a misnomer because what’s portrayed in the shows doesn’t focus on flipping. “The human-interest angles of the story are given much more airtime than any discussion of realistic budgets or timeframes. There is little actual work shown, leading viewers to believe that the houses nearly renovate themselves,” Montagne said.
The immense list of things going on when the cameras aren’t on make up the heart of home flipping. “The reality is that home flipping projects involve a number of moving parts that require serious project management skills: working with contractors, subcontractors, engineers, and architects; securing funding; creating a budget and timeline; completing inspections; getting permits,” Montagne said.
Myth 2: Flipping is a Way to Get Rich Quick
Along with flipping being pretty like it’s portrayed in reality shows, using flipping to get rich quick is probably the biggest myth about buying homes, renovating them and selling them.
Butler says that, while you can make money from flipping homes, it rarely ever happens quickly. “The fallacy here lies in the word ‘quick’. Flippers may very well get rich from their efforts, but most projects are not a quick in-and-out (project) for big profits,” he said.
Part of what makes flipping homes a slow process is that the learning curve is steep, said Allison Bethell, a real estate investment analyst at Fit Small Business. “There’s nothing easy about flipping houses and it takes a large time commitment even if you aren’t doing the renovations yourself,” she said. “You need to find, finance and purchase the house which involves searching for houses, using a hard money lender or cash and then finding, hiring and supervising contractors.”
All of this takes time. Those who cut corners or try to rush the process are going to end up getting burned. And, when it comes to investing hundreds of thousands of dollars into buying and flipping a home, “getting burned” equates to losing big chunks of money.
So, says Ingo Schaer, CEO of Q9 Property Solutions, take your time and dedicate yourself to excellence. Doing so will cut down on the risks and increase your chances of making money over time. “There is no genuine method to get rich snappy. Like any field, real estate investing takes diligent work, assurance, and time to end up effective. You are never going to profit from one flip,” he said. “Rather, you can gradually expand your pay by limiting your hazard, taking as much time as necessary, and by not compromising.”
Myth 3: Your Profit is What is Left After Renovations and Home Sale
Many popular shows list the profit of buying a home as what’s left after you subtract the renovation costs from the home sale.
Unfortunately, this simple equation isn’t accurate, says Ryan Goldfarb, managing partner at Berry Lane Partners. Goldfarb pointed out that “holding costs” play a big role in the real cost of flipping a home. These costs include what you pay each month for your mortgage, utilities, financing, closing costs, interest on loaned money to cover renovations and other expenses.
“Your holding costs consist of taxes, insurance, utilities, and any miscellaneous fees you may be subject to for the duration of your project. Financing costs are the costs incurred from financing the project — whether debt (in the form of interest) or equity (distributions of profit),” Goldfarb said. “Closing costs come from things like paying a Realtor commission (5-6% of the sale price), and fees like realty transfer taxes, recording fees, and legal fees.”
Butler pointed out that these costs often don’t add up to the big profits you’ll see on shows or hear about via flipping sites and message boards.
“The numbers shown on TV aren’t necessarily false, they just aren’t showing the full story. Additional costs such as closing costs, carrying costs and Realtor commissions are rarely mentioned on TV,” he said. “Once you add of the costs up and subtract them from the profits, then we’re back to reality where very few properties are the kind of home runs that drive viewership.”