Episode 55: Flipping Houses
As with all aspects of real estate, succeeding in home flipping requires patience, an intimate knowledge of the market, and a bit of luck.
About This Episode
Thanks to HGTV and the allure of entrepreneurship, people across the country dream of starting their own business flipping homes. This episode digs into the realities of house flipping, and the feasibility of adding these skills to your real estate toolbox.
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JON: It’s extremely likely that you either love HGTV or know someone who does. Home and Garden TV is the cable channel that popularized the home renovation show, a low-stress spin-off from the reality show explosion in the early aughts, when cable executives became enamored by how cheaply they could make lots and lots of TV.
JON: Anyone who’s actually done a home renovation can tell you that cheap is not exactly the right word for it, but in the world of TV production, a few hundred thousand each season is mere pennies. Some of cable TV’s biggest hits are shows based around flipping houses. There is Flip or Flop, Masters of Flip, Flipping Vegas, Zombie House Flipping, Flipping Out, Flip This House, and Flip That House, just to name a few.
JON: House flipping is a potentially lucrative business, especially if you have an eye for design or are the least bit handy. One of HGTV’s biggest shows was Fixer Upper, which ran for 5 seasons and turned its hosts Chip and Joanna Gaines into icons for a certain market of people. That show is also almost singlehandedly responsible for shiplap having taken over the walls of homes across the country, and for igniting the flame in millions of peoples’ real estate dreams.
JON: Hello and welcome to Shop Talk: The Real Estate Show. I’m Jon Forisha, and on this episode we see what it really takes to get into flipping homes, and whether it’s a good idea for real estate agents to pursue it.
JON: First of all, what even is flipping a house? At its most basic level, flipping houses just means buying a house for cheap, making it nicer, and then selling it for more than you already put into it. All three of those steps can have an enormous amount of variation, which is where a lot of flippers find the fun and challenge. For a starter home, making it nicer might just mean some fresh paint and carpet. For million-dollar listings, it might mean knocking out walls or adding a pool. Like all things real estate, the fun can be in the details, and the fact that every house is different in its strengths and potential.
JON: To help us dig in, Zach Levine is with us, Content Marketing Specialist at The CE Shop.
JON: Thanks for joining me, Zach.
ZACH: Absolutely, thanks for having me.
JON: What does HGTV get wrong about home flipping?
ZACH: Obvious or not, they’re not showing you the “behind-the-scenes” work. You know what the sausage looks like, but do you really know how it’s made? That is the problem with these shows, you only see the effect, not the cause, and this can disillusion those looking to get into the home flipping sub industry.
JON: What should every agent know about flipping homes?
ZACH: You’ll need to gain experience in order to make money. Your first few homes need to be seen more like an investment in your education. If you make money on your first few times, great. But if you barely break even, or lose money - a result you must accept as very possible - this is okay. Get on to the next house. Very quickly, you’ll increase your profit margins.
JON: How does someone start?
ZACH: Research, research, and research. Home flipping requires a large breadth of knowledge. And then once you gain a basic understanding of what you need to do, you need to budget utilizing the 70% rule, secure financing, network with contractors and then you can get going on your first house.
JON: Is “being handy” a requirement for building a profitable home flipping business?
ZACH: Absolutely not. Instead, you need to network with contractors who create great but inexpensive work. Yes, if you’re a master carpenter, sure, there’s an advantage. But networking and creating lasting partnerships will get you a heck of a lot further over time.
JON: What regions are best for pursuing this? Vacation homes?
ZACH: I would say right off the bat, region is more important than type of home. And the best states for flipping homes vary drastically; I believe right now the top five states are Kentucky, Pennsylvania, Ohio, Delaware, Connecticut. These are old states with tons of aging homes that need help.
ZACH: That being said, every state has their opportunities. However, places where I would avoid would surprisingly be surging cities like Boise City and Austin. There’s just so much development there, the value of your “flip” diminishes pretty quickly.
ZACH: One other caveat, I would strongly suggest investing in homes near city centers. Whether it’s midtown Atlanta, or downtown Littleton, you decrease risk immensely when you renovate near areas people frequent often. However, with that decrease in risk, so too diminishes your profit margins.
JON: Do you think now’s a good time to start flipping?
ZACH: Absolutely. COVID, no COVID, alien invasion, lizard people explode from the ground, whatever it is, people need homes. There’s always going to be a risk of flipping. You shouldn’t let COVID-19 stop you from pursuing your dreams.
JON: After the break, we list out the steps that can lead you to an incredible side business flipping homes.
JON: You’ve watched hundreds of hours of home flipping reality shows and you’re ready to dive right in. You’re listening to this show and now you’re curious about getting your real estate license. After all, it could save you a lot of money on fees you’d otherwise be paying out to some other real estate agent. If you’re doing all the hard work buying, renovating, and listing that home, shouldn’t you also be the one pocketing those fees and seeing this race through to the finish line? Become licensed online with The CE Shop and save 25% on your real estate education with promo code SHOPTALK.
JON: A good deal in flipping homes can make you a lot of money. As a real estate agent, you’re already familiar with the concept of one great deal making your month or even your year, and it’s the same with house flipping. Buy something for $50k, spend $50k fixing it up, and then sell it for $400k? That’s a great day. But most people who flip homes don’t often see those kinds of returns.
JON: The 70% rule is an oft-quoted starting point for home flippers that’s basically an easy way to ensure that you hang on to that extra 30% for your own profits, or any other costs that may arise as they so often do in real estate deals. Beginner flippers can often get caught up in the nice-to-haves, forgetting that they’re not renovating their own house but rather one they’re specifically going to sell to someone else. The 70% rule can make it easier to not lose sight of the fact that you’re going for profitability and not your personal dream kitchen or bathroom.
JON: Many flipping shows on HGTV will feature the cost breakdown of a property. They simplify it a lot, but it’s impossible to talk about flipping without including at least some numbers. If you hate math, flipping may not be for you, or at least you might want to get a partner who likes making pricing sheets.
JON: To get started in house flipping, you first have to determine how much money you can comfortably work with. As Zach said, not every market is an ideal candidate for flipping, and if you only have $50k to get started, then flipping in San Francisco’s going to be a big challenge. You can break down the neighborhoods of your chosen area by median house price, then start with the lowest rung on the ladder and work your way up.
JON: You may think that the best approach is to tackle the lowest-income neighborhood first, since that’s where your minimal renovation effort could go the farthest, but buying in an unsavory part of town brings its own risks. If you do it right, it’ll be obvious that you’re putting a lot of work into the house, and that brings risks of break-ins. Insurance will also be more expensive on a home in an area with higher crime.
JON: Once you’ve got your area determined, you need a business plan. You might scoff at the term “business plan”; it’s so corporate and exactly the opposite of the free-spirited entrepreneur you aim to be with your new flipping endeavors. But there’s a reason business plans are so vital - they keep you on track. Your plan should consist of budgets, timelines, and scope. Otherwise your first flip will become a money pit with no end in sight and you’ll have to retire there instead of selling it for a tidy profit.
JON: Speaking of budgets, you’ll need to find financing. If you’re independently wealthy and can fund this whole venture out of your own pocket, that’s great, but for the rest of us there are bridge loans. These have much higher fees than your average home loan, but that doesn’t matter because you’ll be sticking to your projected timeline and should only have a few payments on the loan before you pack up and sell the place. Keep in mind that during the renovation, time really is money. Each month that goes by means that you’re spending more on your loan payments, utilities, taxes, and insurance. It’s another reason why creating a sensible timeline in your business plan and really sticking to it is absolutely crucial.
JON: If you don’t want to go the loan route, you could seek private money lenders. Maybe you’ve got a buddy who wants to make a short-term return on his investment while helping you build out your flipping dreams.
JON: At this point, you have to assemble your team. Again, if you’ve got the skills to tear down the walls and put up new ones all by yourself, then power to you, but even Chip and Joanna Gaines have a team of experts to make their plans a reality. Great home flippers have a team of contractors, electricians, plumbers, carpenters, roofers, and the like, to help them get the actual work done. Again, sticking to your budget and timeline are crucial elements, and networking to find the best team to work with can really streamline your flipping business. When undergoing any renovations, it’s important to be strategic. Nowadays, big kitchens and bathrooms are all the rage, but maybe they don’t make sense in your particular house. Losing a bedroom so you can add a master closet or add a tub to the bathroom might be a great idea, but pricing everything out and paying attention to market trends can steer you in the right direction.
JON: Most advice for assembling a flipping team includes one crucial element that you’ve already got a leg up on: the real estate agent. This is where home flipping makes a lot of sense when you’re already a licensed agent, because you can be your own realtor. This can help as you use the MLS to find candidates to flip, but it’s even more crucial during the final and most fun stage of the whole process: selling the home.
JON: You can save yourself 3-3.5% on agent fees for every transaction, and that money really adds up. This also means you’re still intimately involved with whatever may come up in the inspection or buyer’s stipulations, which is perfect because you’re the one who knows this renovated house inside and out. Who better to discuss the particulars of the sale?
JON: It’s definitely possible to make gobs of money with flipping homes, but it’s also possible to lose a lot of money if you let the renovations get out of hand or your market values take a nosedive. There has been much written about how flippers and real estate investors may have helped make the housing bubble that led to the 2008 financial crisis. There’s also the concern of many that flipping leads to gentrification. Gentrification is generally a bad word in any city, a word that leads to lots of new Starbucks and Trader Joe’s coming to town at the expense of those who have lived in the area for a long time. They get outpriced, pushed out, and with many major cities becoming more gentrified and more expensive to live in, there’s often nowhere for these native residents to go.
JON: It’s a complicated issue that we won’t attempt to tackle here, but know that flipping homes doesn’t necessarily make you a part of the problem. You’re taking a house with some issues, fixing those issues, and then selling it to someone who had the cash and didn’t want to solve those issues for themself. In a perfect world, you wouldn’t be going into the rundown parts of town anyway, and would be snagging the neglected eyesores in an otherwise great neighborhood.
JON: As with all aspects of real estate, succeeding in home flipping requires patience, an intimate knowledge of the market, and a bit of luck. Having a great team in place can help you skirt past many problems, and starting small before tackling the big projects can take you down the road to home flipping glory.
JON: That’s it for this episode, thanks for listening! If you enjoyed the talk, you can subscribe to us and review us on your podcast player of choice. Shop Talk is a production of The CE Shop.