Ok I am sure ALL of you have seen at least of of those episodes of Flip Flop, Flip This House, Millionaire Real Estate Agents, and many other shows that make flipping homes seem so EASY, CAREFREE and JUST A BLAST. Well, when things are going well, it is a great feeling of accomplishment as well as earning you a few extra coin.
However, it is ALOT more complicated and difficult than it seems on television. You also may have heard about friends or family of aqcaintences that have dabbled in flipping houses and make it seem so “easy”.
Lets break Flipping down a bit. Flipping is: (taken from: http://www.Investopdia.com)
DEFINITION of ‘Flipping’
A type of real estate investment strategy in which an investor purchases properties with the goal of reselling them for a profit. Profit is generated either through the price appreciation that occurs as a result of a hot housing market and/or from renovations and capital improvements. Investors who employ these strategies face the risk of price depreciation in bad housing markets.
Basicallly, buy low, fix up, sell high.. keep the profits.
Appreciation: Appreciation is the increase in value of an item (in our case a house) over a period time. This is due in part to inflation and the rise in costs of items. Houses in Philly generally (historically) appreciate about 5% per year on average. Different areas and properties may vary.
Closing Costs: Closing cost are the costs associated with selling or buying a home. Buyer closing costs include: items like real estate & transfer taxes, mortgage down payments, certifications (like Use & Occupancy), insurance and at time HOA or Condo fees. For the Seller fees include: both real estate and transfer taxes with are prorated, possibly Use & Occupancy, utilities, any commissions, and other small loosely related charges.
Holding Costs: Holding costs are ALL the costs to maintain the property in GOOD STANDING prior to the sale. This includes things like utilities current, taxes current, maintenance to keep the property up while being “shown” (lawn, cleaning, trash, etc.) as well as any loan, finance or mortgage payments that are due monthly.
Pre-Foreclosure: This refers to properties identified for foreclosure by the bank. It is NOT yet foreclosed so it is USUALLY still occupied. This means you CANNOT view the property and is usually bid on AS-IS.
Tax Lien Sale/ Sheriff Sale: Usually structured and performed by the city or county it is in. Both are sales by either the bank (sheriff sale) or by the county or city (tax lien sale). It is an auction sale and you usually DO NOT get to view the inside of the property.
Although this sounds very “doable” on the surface I want to walk you through some of the pitfalls. Not to dissuade you. I would love to sell your flips but to make this a lot more realistic before you empty your 401k, savings , Home Depot cards or other lines of credit with hopes of not having to work in 7 years.
1: The BUY LOW part of flipping is probably the MOST important part of flipping. This might not make sense but you will see why as we talk about it. The saying is: “You make your money when you buy it”. I tell budding flippers this all the time. It is something an honest mentor will let you know right way. Now the issue with this is that buying low has become alot more difficult (especially in hot Philly). Most “discounted” properties are GONE before they hit the “market” or Trend (the real estate online market place or.. where Zillow, Trulia and the others snatch their listings from… *smirking*). May flipper now count on connections to get them PRe-forclosure listings, REOs, Bank Owned properties, Tax-liens properties, Foreclosure properties, and Sheriff Sale properties. Only savvy agents know how to acquire this and better yet how to get the information to connect the buyers to the sellers of these “distressed” properties.
2: It seems simple enough… Paint..check.. some tile or carpet.. check…maybe a bathroom or kitchen redo.. check… some flowers out front and you are ready to demand above market value on this gem. Well, not so fast buddy. Estimating the amount of work needed and price or each item is an art and many a flipper has a trusty spreadsheet or some, a mental estimate of the price. This is a very important factor. You start of small, then you get talked into a basement reno, the kitchen with high end and granite counter tops and the jacuzzi tube in the bathroom. Well, before you know it $60,000 later you are struggling to do the yard and that electrical panel that you forgot needs to be replaced. Where will you gt the $$$ to finish…. you finish the story.
3: Selling you expect to put it on the market, and in 3 weeks, sold for full price. Its is Brewerytown or West Oak Lane or Mt. Airy, why would it NOT sell quick. Now you find that there are a few other “flippers” with the same idea and you are the third rehab listed on the block and you emptied your savings during the renovations. Holding costs are the costs to hold onto the property WHILE you wait for the sale. Any renovation loans (to banks, people or family), taxes on the house, utilities, maintenance and security or the property and various other expenses not accounted for but related to keeping the house in “sell-able” condition.
NOW, if I haven’t totally scared you away, fear not here comes the good parts about how and why you might succeed in “Flipping in Philly”
1: Philly is HOT, still RED HOT for flipping in the United States.
Also, there are various areas in Philly specifically that are hot as well.
This chart lists the SAVINGS. Now remember the savings come from buying CHEAP, MAINLY BY “DISTRESSED PROPERTIES” like Foreclosure, Short Sale or Tax / Sheriff Sales. That means SOMEONE Loses….. to the tune of :
- You actually work backwards
- You actually work backwards
- You actually work backwards, from the price you believe you can comfortably sell it for (end result), back to the price you need to purchase it for.
Think of it as an math problem.. sorry, talking money you know math would eventually be involved.
ARV – Amount of $$ to rehab – The possible holding costs – Closing fees – Holding fees – the profit you would like = The price to buy the property at. You can see why you want to buy it very cheap. Let’s put some imaginary numbers to make it a bit more real.
(ARV) $ 145,000 (a typical sale price of a property in West Oak Lane and parts of Mt. Airy)
minus – $ 50,000 (a rough estimate for a typical 3 br row home rehab)
minus – $ 2,000 (holding costs: including utility bills and other stuff)
minus – $ 12,000 (Closing costs including commissions, transfer &other taxes)
minus- $30,000 (Profit magin)
(Price to pay for the property) about $78,000.
Granted everything works out PERFECTLY, you might be able to buy at about $78,000 and be off to the races. HOWEVER, there are ALWAYS things that happen
- the subfloors are shot and need to be replaced
- termite damage
- plumbing and electrical all need to be replaced completely
- main sewer line cracked
This can ballon your repair/ renovate costs to $65,000 easily. Not to mention holding costs rise as the rehab timeline takes a major hit to redo something and now instead of $2000 it is $4500. Contractor issues causes a loss of another $3000. Sure you can see how this can EASILY get out of hand.
Also, Time is a VERY, VERY important factor in flips. You are ALWAYS racing time. The longer it takes to renovate, the more it will costs and the more holding costs you will pay. Some people try to do the renovations on their own but let me ask you…. How long has it taken you, “my handy”, to fix the basement bathroom or replace the shower faucets with new washers? How long, after a full time day at work, do you think it would take you to totally break down a bathroom to the studs and renovate it including electrical, tile, drywall and fixtures. Exactly.
In closing I will leave you with some links to sites that helps educate and support flippers:
- Bigger pockets
- REI Club
- 1-2-3 Flip
- Rehabber Pro
Also there are a few people that have been doing it in Philadelphia for a bit and have blogs and videos.
I will end here. I know there is Soooo very much more to learn and know so if there are any questions fee free to email me at firstname.lastname@example.org.