Saturday, February 9, 2008

Getting rich flipping houses

I love watching the flipper tv shows about how someone with no experience can quit their job as a hairdresser (no offense to hairdressers; just what the show was about), and without building permits, apparently without closing or transaction costs, and certainly without any waterproof backing behind the shower tile and stone that they all insist on, can make a trillion dollars in four weeks flipping a house.

Tonight, I saw a first for me. At the beginning of the show was a warning: "These are real people investing real money. You can lose money flipping houses." (Or words to that effect. The show was "Flip That House.")

I recently predicted to a friend of mine, only a little in jest, that with the slowdown in subdivisions being built, the construction defect attorneys will be out of work soon and likely shift their focus from suing developers and builders to suing real estate agents, appraisers and lenders, for not adequately warning purchasers that they could lose money buying a house.

25 comments:

sacramentia said...

good post. It always kills me how the flip profit never includes Realtor fees or cost of money during the flip. Flipping adds very little value and only works if
-you have realtor's license
-and market appreciation > than your cost of money.

When these shows are finally pulled we'll be near the bottom. What a bunch of crap.

Jacob said...

I like these shows. I like getting design ideas and also like seeing some of the shortcuts people take so I can be more aware of it.

Recently the shows are not showing sold prices, just for sale prices and "potential" profit.

But yea, that profit never shows fees and taxes, and if they are doing the work themselves it doesnt show the pay/hour they got.

I saw one where these 3 guys buy a nice home and the host recommends some cosmetic fixes and get it ready for a quick sale, but no they want to knock down walls, redo areas, add on a master suite, and they did a poor design to boot.

Then they did so much that they had to price it above what the area could really afford so it just sat.

coffee is for closers said...

Most of these flippers dont even know how to swing a hammer.Real construction folks just laugh at their pathetic skills.It just shows you what mania was out there.People went from flipping burgers to being real estate investors overnight.There is a lot to being a good real estate investor, it is not easy.You have to have a lot of diverse skills to succeed.The smart investors were unloading property in 2005.Now they have cash to buy at 50 cents on the dollar.This is where they make their money.Buy low and sell high.hogs get slaughtered!!!!!!

Cmyst said...

I saw one on HGTV about 6 months ago about a young couple who attempted to flip a house in Del Paso Heights.
You heard me right.
He worked some warehouse job, IIRC, and she was a Medical Assistant. They lived in an apartment.
The house, aside from being in a marginal to bad neighborhood, was tiny and old. It needed a lot of plumbing and wiring replaced. It looked really cute when they finished, but of course they couldn't sell it. I hope they at least moved into it, but of course that hadn't been their plan. Their plan was to flip it and then buy in a good neighborhood.
Why do people think that they can make money fixing up houses in places like Del Paso Heights and Oak Park??
I was listening to some radio program yesterday on the way to work that had a NAR shill on talking about how much more you could make with various renovations. I couldn't believe my ears. People really believe that crap. If you added up all the "extra" money you could make, it probably came to about 200% over the comps in most neighborhoods.

Paul said...

Contrarians believe that as soon as the guy/gal on the street is telling you how much money he/she made "investing" in flipping houses, dot.bomb stocks, gold, Dutch tulips ... then it is time to sell. The masses will always be on the wrong side, buying high and selling low.

Jacob said...

I was flipping through the channels last night and found some tool on an infomercial selling his book on how to make millions flipping houses.

Host: Do you need any experiance?
Tool: Nope

Host: Well it probably takes a lot of money to get started.
Tool: Nope, you can do it with no money and 100% financing, just buy my book.

So to recap, all it takes to make millions in the realestate market is to buy this guys $25 book. No experiance and no other money is required...

lol

Sippn said...

Remember watching This Old House in the Bob Vila days... when they would almost always go over their budgets by double, even after donated Pella windows, etc. These gold plated homes would aften go @200K over budget 15 years ago.

Don't wonder why a tract home is simple... air, drywall and a roof, the rest is expensive.

Mystere said...

Paul, taking into account your comments re: contrarians, would it not also apply in reverse? In other words, with so many people now screaming that the sky is falling in real estate and it's a horrible time to buy...

The reality is that it's always a good time to buy...and it's always a bad time to buy -- it all depends on the particulars of any given property, price, circumstances, etc. Certainly, in a market that is well off its peak the risks in general are being mitigated.

Paul said...

Mystere: I agree 100%. Contrarians would look for an indicator as to when we had reached the bottom. From my readings, true contratians would want everyone to "throw in the towel." With so many folks saying we are at a bottom now, or that we should be buying now, that suggests we haven't seen capitulation yet. But I'm also not sure we will see capitulation in the real estate market. My guess is that we will just see continued price declines coupled with declining sales volume.

Intellectually, I believe we are some distance from "the bottom." But if the right property came along today, at the "right price," (whatever that is), emotionally it would be hard for me to not write an offer. I've had a couple of "near misses" in the past few months.

smf said...

Flipping shows are a joke, any of those shows are jokes ripe to be criminalized for gouging.

I recall hearing on one show: 'If you spend $15K in renovation, you can raise the price by $80K.'

Yeah, really nice...

But if the right property came along today, at the "right price,"

I keep hearing about the 'right house', as if there are loads on them around.

First of all, at least to me, the right house will not be and can never be a tract home. That eliminates a lot of the market.

Then the house would have to be in a very nice location, eliminating the typical tract home suburb out there.

Little bit of a rant, but I have had friends talk about having to purchase a tract home, as if their was the only model, and the same with the houses in Gold River, when most of them look the same.

Observant One said...

Well, smf, simple math suggests that if you can't find the right house in the midst of the greatest housing bust in U.S. history, then I suspect that you're never going to find it. After all, as new home construction continues to decrease and as existing inventory is absorbed, it's not like there will be -more- of a selection to choose from. The chances of "the one" being out there and available (at advantageous terms) are greatest in a bad market, not a good one.

smf said...

"you can't find the right house in the midst of the greatest housing bust in U.S. history, then I suspect that you're never going to find it."

1. We have seen several houses that we like, just not at the right price, yet.

2. Both sets of parents took many, many years to find their 'dream' home. We can wait...or maybe build.

"After all, as new home construction continues to decrease and as existing inventory is absorbed, it's not like there will be -more- of a selection to choose from."

1. Excess inventory will be here for YEARS, it will not disappear overnite., Last condo bubble in Miami finally came to normal levels after 6 years. This one will take a while.

2. Selection doesn't quite matter when all the damn houses look the same. A lot of these high end homes look the same to us, completely uninspiring in the inside.

3. True architectural gems are few and far between, but we have the luxury of waiting. We don't NEED a house, as we already have a house we love. We WANT a bigger house, that's all.

Observant One said...

With new construction having plummeted, and continuing to plummet, we'll see just how long excess inventory exists. By the way, we aren't in Miami, we're in Sacramento. And in those areas of Sacramento which are desirable (i.e., -not- Natomas or Elk Grove), inventory already is correcting appreciably.

And I do find it a bit ironic that you take the position that there already has occurred an inventory explosion...and yet you'll perhaps choose to build. At any rate, if you can't find a home that is distinguishable from any other, then maybe you aren't looking in the right places.

Or, like I initially suggested, maybe you'll never find it.

I'm not bagging on ya, SMF; it's all good. I just find your views rather...extreme.

smf said...

"And in those areas of Sacramento which are desirable (i.e., -not- Natomas or Elk Grove), inventory already is correcting appreciably."

Really? In the middle of the low season? As typically happens, year after year? Let's wait till springtime, and I can guarantee that we will soon hit another inventory record.

You see, as noted on previous stories, a lot of the sold homes have gone to foreclosure flippers. These people are banking on appreciation occurring soon enough to make them a nice profit. When it becomes obvious that it will not happen, they WILL sell.

Even in really nice areas you have excess inventory and not enough buyers. Just go to the MLS and do a little study of how many mansions have been built recently (after 2000). You'll find out prior to 2000, few are found. After 2003, an explosion occurs. Nothing different has happened in this area to justify this.

We are now in the Katrina stage. If you recall, it was way after the storm that the levees broke, when the talk had already stated how New Orleans had dodged a bullet. We know what happened next.

"and yet you'll perhaps choose to build"

Why not? All this homes look the same. Granite in the kitchen, SS appliances, crown moulding, column in the entrance, jacuzzi tub, 'neutral' colors. We can go 10 years in the future and see these homes being dated, as a certain 'fashion' was followed when they were built.

I want a home that we can be proud of, not a copy of what every else has.

"I'm not bagging on ya, SMF; it's all good. I just find your views rather...extreme."

I rather call them 'educated', and so far I am batting pretty high.

Cmyst said...

"And I do find it a bit ironic that you take the position that there already has occurred an inventory explosion...and yet you'll perhaps choose to build."

It may be ironic, but it makes sense to me. It seems evident that there has been significant overbuilding of the same types and designs of houses.
For such a huge investment, it would be great to get exactly what you want. If land costs go down enough, and construction costs continue to go down, it's certainly something I've considered as well.

Paul said...

Building v. Buying: I understand the merits of "building exactly what you want." The problem I am having is that now, I can buy for less than I can build (at least in ED Co with $75k or so in permit fees). And if home prices continue downward, that will make it even harder to justify the economics of building vs. buying an existing. Yes, maybe I'll buy something that isn't perfect ... But having built before, I know that isn't "perfect" either. So far, in ED Co., I have not seen significant price declines for land/lots. Production builders are selling land at big discounts, but individual custom lot owners don't appear to motivated yet. Two reasons that I can think of: (1) Mostly the lots were cash purchases, so no threat of ARM resets; and (2) No pressure that I have seen yet from REO land sales.

However, I suspect that land prices will come down, but tend to lag the home prices.

Jacob said...

How do you look up land prices and permit fees to build?

smf said...

"For such a huge investment, it would be great to get exactly what you want."

We rather build quality over size. Some of the higher quality homes are also very large homes. Their monthly maintenance costs are also very large.

By carefully designing a home, we can minimize the square footage and add construction costs by installing truly unique materials.

Example: If we are buiilding a nice house, I want people to get impressed by it at the moment they see the front door.

Another pet peeve. When you see a nice home with a common kitchen hood. I want a custom kitchen hood.

Paul said...

Jacob: Land costs are what you are going to pay. Metrolist and realtor.com have land listings locally. For permit fees, at least El Dorado County has most of the permit fees on its website (but does not include water meter and sewer fees).

SMF: I agree 100%. I would rather have quality than size. Have you read any of Sarah Susanka's books? If not, I would recommend them. "The Not So Big House."

Something conspicuously absent from the local market, are modest homes with style and quality.

sacramentia said...

"Something conspicuously absent from the local market, are modest homes with style and quality."

Great point. Why doesn't anyone build a nice home on a great lot?

Maybe there isn't really a market for it.

sacramentia said...

should have read, nice, smaller home on a great lot. Many do build nice homes on great lots - they just tend to be 4500+ ft.

Paul said...

Sacramentia: I believe the answer is economics. Having built spec homes in my youth, my experience is that although folks talk about wanting quality, very few are willing to pay for it. By quality, I mean attention to design and construction detail at every level. Generally, folks were more interested in buying "what they could see" the what they could "talk about," than so many design and construction elements that can't be seen and most care little about. And when you build a modest sized house with quality throughout, the cost per square foot skyrockets ... so it's hard to get an appraisal and harder to get a buyer when they are thinking they get "so much more house" for the same money, down the street.

If you truly want a quality home, by the lot and design and build it. The economics maybe won't work out all that good, but I think this is a prime example of you get what you pay for.

smf said...

I was actually also referring to the uniqueness of the material used.

A lot of the materials and finishes used were the 'Home Depot' special. Easy and cheap to obtain because it is standard and everybody uses it.

We'll be more into looking into atypical materials and design features as well.

Gwynster said...

And what I want it a box, with zero finishes inside so I can add my selections with time. If I could buy a house without builder grade cabinets and at a price that reflected that, I'd be all over it.

sacramentia said...

Paul - 900k for a 2500ft home probably wouldn't sell. Besides very few are going to be 'impressed' by a smaller home. That just isn't the way people that get impressed by stuff usually think.

We went through the size drill and ended up buying 25% more house than we wanted in order to get the location and quality we were looking for. The nice surprise has been that the utility bills half my original estimates.

We went the dream home route before and once we build it realized two things: It was more fun to dream than to have, and some of our dreams were wrong. And one thing is for sure: your dream home is most likely no one else's dream home!