I receive a lot of emails and phone calls regarding the practice of flipping. No wonder, it sounds almost too good to be true. There are a gaggle of real estate gurus clogging the late night airwaves with their gibberish and get rich quick schemes.
Like the NASDAQ boom that turned air into money, it's hard to shake that uneasy feeling that "everyone is getting rich except me." But, you can relax in the knowledge that it isn't necessarily so. It isn't a very good bet that you will flip your way to significant wealth, and you do stand a pretty good chance of losing money.
Historically, flipping has referred to the practice of acquiring real estate at substantially less than the market value and reselling it quickly at full market value.
Note the emphasis on the word "substantially." People often overlook, or underestimate, the costs associated with selling. Multiple Listing exposure is vital to assuring maximum exposure and obtaining the highest possible price. In addition, there are a host of regulatory requirements placed upon the seller that are often best complied with by paying a professional. In addition, loans repaid quickly are often subject to a prepayment penalty, and property sold within two years of acquisition is usually subject to capital gains taxes.
Finding property well under market value is the great urban legend of our time.
To understand the phenomenon of flipping, it is important to understand that in an appreciating marketplace, there is usually a principle of "shortage" at work. The demand is so great, and major developers dominate to such an extreme, that they literally have war rooms staffed to strategize and track both, developable and re-developable real estate, plus every resale and new property. They are seeking market data and opportunities, and are planning years in advance.
In the markets where flipping is feasible, areas with strong employment and growing population, competition is the greatest.
Bear in mind that real estate markets are local, and that every property is unique. Values are driven by issues of supply and demand and the local economy.
So, it may be quite possible to buy real estate for less than the value of comparable properties in those parts of the nation that are losing jobs. It will be virtually impossible to sell that property quickly for substantially more than was paid.
That leaves new construction, distress sales, fixers, and foreclosures as possible sources of under-valued real estate.
The process of providing the nations housing is both inefficient and difficult to manage. The regulatory process is slow and the procurement of labor and material unpredictable. Only through mass production and the economies of scale can a developer hope to make a healthy profit. Consequently, housing is delivered to the marketplace in quantities that do not mesh perfectly with the ebb and flow of demand.
Pre-selling is the builders and flippers friend. Once a project is cleared, it may still be two to three years before the first units are available for occupancy. Pre-selling offers an increased sense of security to the builder and their finance partners in an all or nothing venture.
In a traditional suburban horizontal subdivision, the builder has the option of building in phases that are reflective of the rate of demand, realizing an immediate return, minimizing risk of market shift, and retaining the ability to adjust prices in each phase. In a vertical subdivision like a high-rise, it is more difficult build in phases.
Investors with ability to tie up a healthy deposit and wait years for their return can realize substantial profit in a hot market. They can just as easily get stuck with a property they never intended to own, don't want, and can't rent for anywhere near the amount of the mortgage payment. Flipping is a limited opportunity that diminishes as the number of flippers entering the market increases, by the time your manicurist is talking about flipping real estate, the local market opportunities are tapped out.
Again, homeowners in distress, fixers and foreclosures become the opportunities to buy real estate far enough under market that you can resell it quickly at a substantial profit.
Let's be very clear, when you target homeowners in distress, your intention is to defraud them of the equity that is rightfully theirs. It isn't illegal, but it does require manipulation and deceit. The only reason a seller in distress would decline to receive full market value for their property is if they didn't know what the true market value was.
If you have the expertise, ample spare time, access to below market labor and material, available cash to carry the property for several months, you may be able to add sufficient value to a fixer to reap a healthy return, but the odds are against you.
In strong markets, few properties make their way through the foreclosure process. Generally, sales occur quickly enough to prevent foreclosure and lenders tend to be very cooperative with defaulting borrowers who have a viable plan for curing the default. In those cases where a property does wind up in a foreclosure auction, you will be bidding against professional buyers armed with cash. They are disciplined, patient and prepared to walk away. Ironically, the word "foreclosure" has enough cache to bring prices at or above market value.
The fact is that very few people get rich quick in real estate. You are probably better off playing the lottery, the losses are more manageable and the payoff greater.
Real estate wealth, like almost anything of value is built over time, not overnight.
George W. Mantor, known as the "Real Estate Professor," for his consumer education show on AM 1000 KCEO Keepin' It Real ("real talk about the real thing. Real estate!") possesses over 25 years in the industry and is the founder, president, and CEO of The Associates Financial Group Inc. an independent, locally-owned, full service real estate and mortgage brokerage, headquartered in Carlsbad, California, dedicated to developing long-term relationships with clients.
