Do you have what it takes to turn a dump into a delight? It takes a special kind of personality
Before and after: Above, a gutted kitchen; below, the flipper’s redo — stylish, but not pricey.
By Arnold Wayne Jones
On an episode of Will & Grace, the lead characters planned to make money flipping apartments with the motto, “The Flippers Who Care.” The same happened last season on Modern Family. And Bravo TV’s Flipping Out was all about gay real estate mogul Jeff Lewis and his business of buying, renovating and reselling homes.
Clearly, it’s something the gays were meant to do.
But just how easy it is? It depends on your motivation, your skills … and your business savvy.
Tony Sicilian, a Dallas-area real estate investor, says knowing if you’re the right kind of person to flip “is the million-dollar question.”
Sicilian has been at this game for about eight years and recently went back out on his own to set up an investment group with his brother. Being a flipper (at least as people understand it from watching HGTV, Sicilian says) requires “optimism and vision. Whether you need to be excellent at design or fabulous at money, that’s secondary. But you have to be able to see the product in your head when it’s done.”
Sicilian calls the current real estate market “one of the most insane we have ever seen. There used to be a three-month supply of product on the market; now, when one house sells, there’s only a 30-day supply at any given time. Things are going up and selling that day. It’s great for a lister, but bad because everything has gone up and your window for finding a good deal is very, very narrow.”
Still, investors like Sicilian can usually find deals when there are motivated sellers who haven’t listed their homes yet.
“We’re advertising for distressed sellers in need of a quick solution,” he says. “I’ll buy for cash and resell them quickly. Buying from an investment group is smart — you can usually buy 75 to 80 cents on the dollar.”
And, he says, the amateur can do it, too … if he or she has the wherewithal to navigate the innumerable pitfalls and secrets to real estate investing that can trip up the unwary.
Keith Yonick, a Realtor with Prudential Texas Properties, has seen flippers and knows a few ins and outs to doing it the right way.
“The ‘seasoning rule’ is very important,” Yonick explains. “When you file the deed [on a property you plan to flip], you must wait three months before you [resell]. If the deed is not expedited, it can be a disaster” trying to sell an unregistered deed.
Not all homes are created equal, either. “HUD homes are a bad idea to flip because they do so many inspections,” Yonick says. The bureaucracy can slow down turnaround. “And do not attach to the listing — they could come up later!”
Because foreclosed properties do not have a disclosure process, it’s “buyer beware!” “Many investors do not like [investments like flips], so lenders are harder, and underwriters tear them apart.”
A rule of thumb is, factor in a 12 percent sales cost (that’s high, but it’s better to be high than low, Sicilian says) “and buy at retail 75-80 cents on the dollar, less repairs.” So, if you’re hoping to see a house for $100k and plan to put $10k of work it, don’t pay a purchase price more than $65–$70k.
“You think you should buy a $100,000 [at a discount] for $75,000, then you put $10,000 into it and sell for about $110k,” Sicilian says. But it doesn’t always work that way. “There are tons of hidden costs,” he explains. “For instance, if you buy a foreclosure — which isn’t the right way to flip, but as an example — you’ll have to pay closing costs based on the higher value. The margins can hurt really quick.”
There are full-time flippers who have this down almost to a science; but if you are thinking of doing it as a part-time hobby and secondary income source, make it easy on yourself.
“If you’re not doing this full-time, you definitely want to find [a property] that doesn’t need an insane amount of work, like normal paint and carpet and foundation fixes — this is North Texas after all,” Sicilian says. Your margins might not be as sweet, but it’s good training for more complicated deals.
“One rule of thumb for flippers is always to buy a lipstick redo —the little old lady’s house,” Yonick explains. Those usually require mostly cosmetic changes by visionary flippers who can get a good deal due to bad curb appeal and unfortunate décor choices, but which can have unseen problems. (Nevertheless, the appeal of so-called “ugly homes” is overstated.)
Costs will always underscore the profitability of a flip. But it helps to think long-term. Consider all actual costs of everything going into the house — staging costs, electricity costs when you’re showing it, interest on any money you borrow, insurance, labor costs and more.
“One of the biggest things people forget is the stuff behind the wall,” says Sicilian. “When you sell, there will be an appraisal and an inspection, but people forget to look at stuff like electrical, plumbing, foundation. You might not think it’s off but you’ll need an engineer’s report which, will cost you $500” — another of those hidden costs. And it’s a good idea to do pressure tests on your plumbing lines early, so you don’t find out three months later you have a leak. “You’d rather know upfront to spend an extra $500 and not spend $5,000 later,” says Sicilian.
“For a buyer going to FHA for an insured loan, they will be looking that what they are collateralizing is a good, secure house,” Sicilian says. “So, cutting corners isn’t always smart — it may save you money but will cost you down the line.”
Of course, there are often hidden bonuses as well. Buy one of those old-lady homes, and you might just pull back the original 1950s carpet only to discover pristine hardwood floors. “Those are ‘in’ right now, and you just got them for free!” says Sicilian.
This article appeared int he Defining Homes Magazine, October 4, 2013.
