Five Reasons Why Real Estate “Reality TV” Isn’t So Real
According to what you see on TV, house flipping is fun, exciting, and a ticket to instant wealth. Authors Scott Frank and Andy Heller warn you to learn what you’re really getting into before you jump on the real estate bandwagon.
Chicago, IL (October 2006) – House flipping seems to be the new American Dream. TV programs on the subject abound, showing you how to improve and sell a house (yours or someone else’s) or transform one of the ugliest properties you’ve ever seen into a fabulous, who-wouldn’t-want-to-live-there dream home. Your bookstore’s real estate section is bursting with how-to titles that make house flipping look as easy as pie. Even more intriguing are the friend-of-a-friend stories you hear: your neighbor says his uncle bought two homes and a new boat with the profits he’s made from flipping just a couple properties. Sounds great … but is it really that simple?
Absolutely not, say Scott Frank and Andy Heller, co-authors of the new book Buy Even Lower: The Regular People’s Guide to Real Estate Riches (Kaplan Publishing, 2006, ISBN: 1419535749). The reality TV view of house flipping-that you magically find the right property, buy it, fix it up, sell it effortlessly, and enjoy a hefty profit-is misleading at best. It conveniently leaves out the time, the risk, the stress, the headaches … and the failures.
“It may look easy, fun, and exciting on TV,” says Frank. “But remember, TV is entertainment. The real world can be anything but. I’ve found that most of the time people who jump into flipping real estate based on TV shows and/or hearsay from friends never fully know what they are getting themselves into.”
“Most people want to get into house flipping to make a quick buck,” adds Heller. “It usually doesn’t take them long to find out that while that is possible in real estate, fast profits are the exception rather than the rule. And success rarely comes easy!”
To help new investors, Frank and Heller have put together five reasons why buying and flipping property isn’t usually the cakewalk portrayed on TV.
Flipping can be extremely time consuming. When they first decide to try their hand at house flipping, many people think they will be willing to put in whatever time and effort is necessary to make their dreams come true. Or they think because real estate investing is going to be a hobby, they will simply dip into their hobby-time bucket to do it. Unfortunately, both expectations can be unrealistic. Many people aren’t prepared for the large amounts of time that go into house flipping, particularly during the buying phase. To profit, you will need to purchase at a deep discount (often 25 percent or more). Because the pool of properties with this type of discount is usually small, you’ll usually have to work extra hard and invest significant time to find them.
“Many first-time investors who choose the ‘Buy and Flip’ investment strategy don’t expect to spend much time finding the property,” says Frank. “All those fix ’em up TV shows make it look like the properties are abundant, and that most of your time is spent repairing the property and getting it ready to sell. That’s actually backward. In reality, if you want to profit from your investment, you will search and search for a property that you can purchase at the right discount. Then you will actually make the repairs relatively quickly to get the home back out on the market.”
Costs can get out of hand. Big discounted properties are discounted this way for a reason. Most of the time, it is because they will require significant repairs before they’ll sell for a profit. What’s more, many misguided, first-time investors come in looking to make the dramatic changes they see investors making on reality TV – unaware that their goal should be to make the property comparable to surrounding properties, not better than them.
“There is a difference between remodeling a property and making necessary repairs,” says Heller. “When you calculate your repair and improvement costs, they should be based on putting the property in comparable condition to those surrounding it. Often the houses you see flipped on TV go through dramatic changes: new kitchens, changes to the exterior, extravagant additions, and so forth. Those investors are often spending big money on changes that aren’t necessary in real life but make for good TV. These extra repair and improvement costs can take a big bite out of your profits. Focus on the necessary changes. Repair broken windows and fix a leaky roof, but don’t put in a new swimming pool simply because it will make the house more valuable. Think, ‘Will the repair or improvement make the house more profitable?'”
House flipping is a stress-filled business. Because profits are actually realized after the sale of the property, every day that goes by – and that the property goes unsold – eats into your profits. You’ll want to sell the property as quickly as possible, which at times can cause many headaches. In their book, Frank and Heller lay out three common areas of stress:
1. Unless you use a real estate agent (which will cut into your profits), you’ll probably deal with many people interested in buying the property.
2. Every day the house goes unsold the holding costs increase (utilities, mortgage payments, advertising costs, etc.) and continue to eat into your profits.
3. Deciding if and when to reduce the sales price or include a real estate agent (and lose a portion of the profit to the agent’s commission) to help sell the property.
All of this stress can be overwhelming for first-time flippers. If you know what to expect, you will be better prepared for real estate success.
You may end up with a property that is hard to sell. Occasionally, you will buy a property at a discount because it needs more than simple repairs. It may even have problems that can’t be repaired at all. Is it in a bad neighborhood? Too close to a busy street? Was it built on a steep hill? These factors will allow you to pay a discounted amount for the property, but they may make it difficult for you to sell when the time comes.
“You don’t want to end up with a property that is too difficult to sell at a profit,” says Heller. “You need to make sure that you understand the issues and get enough of a discount when you buy, so that you can address the problems and still profit when you sell. If that just isn’t the case, it may be in your best interests to move on to the next property.”
Unexpected costs could ruin your profits. To ensure there are no surprises when the property becomes yours, make an appointment with an inspector while the contract is being finalized. The inspection report will spell out problems with the property that you’re already aware of, but occasionally it will inform you about a new problem. This process helps ensure that you identify and assess all problems, understand repair costs, and line up workers to make the repairs. Most importantly, it provides an opportunity to reopen negotiations and ask for additional discounts to cover unexpected repairs. When you bring these problems to the seller’s attention, they may choose not to fix them, further discount the property, or compensate you in another way. In this case, unless there is still room under your maximum purchase price (the most an investor should pay for a property to obtain the appropriate profit) to cover these extra costs, you may have to walk away from the property.
Still want to give house flipping a try? That’s fine. Just make sure you know what to expect. Reading Buy Even Lower is a great start. Frank and Heller lay out their Six Golden Keys to building wealth through real estate. They tell how to determine your minimum investor discount, know what a good property looks like, find these good properties, calculate your maximum purchase prices, make solid offers, and negotiate like a chess master. All of these skills are vital to your success, and no TV show will convey them in a more easy-to-understand way.
“I don’t think anyone should get into house flipping based simply on the glamorized picture television portrays,” says Frank. “That’s almost a guaranteed recipe for problems. Very costly problems. Educate yourself. Go through each of our Golden Keys, so you know what elements to look for. Then you too can be successful in real estate investing – in the real world.”
Scott Frank is an executive in a Fortune 100 company and has been buying, renting, and selling residential real estate on a part-time basis for more than twenty years. Scott is married with four children and resides in Atlanta, Georgia. Andy Heller is an executive in an international transportation firm and has been buying, renting, and selling residential real estate on a part-time basis for more than fifteen years. Andy is married with one child and resides in Atlanta. Together, Scott and Andy have bought, rented, and sold approximately one hundred properties valued at over $10 million. In 2003, they wrote the Fortune magazine-recommended book entitled Buy Low, Rent Smart, Sell High.
Buy Even Lower: The Regular People’s Guide to Real Estate Riches (Kaplan Publishing, 2006, ISBN: 1419535749) is available at bookstores nationwide, major online booksellers, and www.RegularRiches.com.
For more information, please visit RegularRiches.com.