After years of popular cable television shows that give people with no real estate experience the idea that they can flip a house and make a profit easily, real estate agents find themselves in an unenviable position. While every real estate agent wants to make as many sales as they can, trying to help someone with absolutely no experience in real estate development to find a house to flip can be a nearly painful proposition. Before you decide that house flipping will make you rich, there are a few realities you need to understand.
In the early days of house flipping shows, there was a disregard for all of the costs associated with flipping homes. The shows would outline the purchase and remodeling costs for the investor, but ignore holding costs. Holding costs come with every home and they consist of:
- Monthly mortgage payments (unless the property was purchased with cash)
- Monthly utility payments
- Property maintenance (landscaping, snow removal, repairs, etc.)
If you are unable to remodel and sell a property within 30 days of purchasing it, then you will have to deal with holding costs. Even if you purchased the property with cash, the holding costs could add thousands of dollars each month to your expenses and eat away at your profits.
Real Estate Math
To the real estate novice, buying a property that is worth $100,000 for $60,000 and doing $20,000 worth of remodeling should bring in a $20,000 profit. That is a great idea, but that is not how real estate math works. Every real estate equation is extremely complicated and includes elements such as:
- Fluctuating property values
- Changes in the neighborhood
- Shifts in real estate buying trends
- Changes in the zoning laws that bring unwanted commercial development closer to your residential property
It is impossible that you would put $80,000 into buying and remodeling a property, only to have it sell for $70,000 because of current market conditions. If you have no real estate experience, then flipping houses is incredibly risky.
House flippers have the option of hiring a real estate consultant to help them estimate remodeling costs on a property, or they can try estimating the costs themselves. Even if they bring in a pro, there is still the possibility that unforeseen problems could add thousands of dollars to the remodeling budget.
Real estate novices might also find it difficult to navigate the zoning laws and permit regulations for a particular area. For example, if a novice decides to implement a remodeling plan without first getting approval from the local zoning department, then it could costs thousands to alter the changes that violate local zoning laws.
If you want to get involved in the world of flipping houses, then your best bet is to learn from a professional and don’t go out on your own until you are truly ready. When you invest in a house to flip and you lose money, you usually have no recourse. Most of all, you cannot sue the real estate agent because they were only doing what you asked them to do.
Flipping houses is an expensive gamble that should only be done by experienced investors. Before you start putting your money into house flipping, you should take the time to understand the business and get a comprehensive understanding of how you can make money.