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business newsOn the Business of Being a House Flipper
By
Adam Katz
Jul 13, 2011 11:00 am
House flipping is a high-risk game and difficult to do profitably. But markets that are fragmented, illiquid, and depressed can present opportunities.
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What historically occurs during periods of economic strife and low employment is that people gravitate toward urban areas because that is where the jobs are concentrated. Here in Phoenix, I see a lot of home flippers buying houses for $60k out in the middle of nowhere (Buckeye, Maricopa, Apache Junction… sorry if you are from there), putting $5k worth of paint and carpet in the home and selling them around $80,000. I also know people who are buying at $80k and trying to sell for $95k. Anyone smell a greater fool? I’m not smart enough to know who gets left without a chair out there when the music stops and so I don’t play that game. Furthermore, I often hear the argument that people are migrating to the outskirts of the greater metropolitan area for more affordable housing. To them I ask: Do you want to be betting your dollars that people who have opted for a 90-minute commute at $4/gallon gas to be driving the profitability of your business? Whether they are in the business of flipping or renting, they are betting on a consumer that has a likely negative trajectory with respect to their personal finances.
Now, contrast that with what, not surprisingly, is going on in urban areas where there is some decent job growth. Phoenix’s unemployment rate is hovering around 8%. While certainly not healthy, it is below the national average and showing some moderate improvement. Specifically, we are experiencing growth in primarily four areas according to the Bureau of Labor Statistics: medical, technology, leisure/hospitality and professional services fields. These fields typically employ upwardly mobile professionals that are able and willing to either rent or purchase homes at a premium. My business makes it a point to produce homes that have features, both functional and aesthetic that speak to this market.
So, what I tell people who ask about my home-flipping activities is the following:
- Be a "Peter Drucker" guy: price lead costing is key. Know what the spread is between distressed real estate and nicely done real estate, both on a total basis and on a price per square foot basis. Knowing what you can reasonably expect to sell the real estate for and how much time it will take you to sell it is the large part of the battle. It is part art (predicting short-term pricing movement) and part science (analyzing data from actual and very recent transactions). Use what information you can gather from your broker about recent comparative sales and get the science part down. Figure out what your remodel costs are going to be and deduce what you will need to purchase the property for in order to make a profit.
- Carve out a niche for yourself in a market that appreciates your strength. My business specializes in converting old, outdated properties typically 60+ years old into open modern spaces and with features that speak to the needs of our market. For example, my average renter makes $190,000 per year and spent almost $60,000 on the car they currently drive. Not surprisingly, garages are important to my typical customer. We are in Arizona and my typical renters likes to entertain around pools outdoors and big islands indoors, so guess what? We try and incorporate pools and big kitchen islands into almost every home we do. Etc, etc, etc.
- Be honorable. In a market littered with folks of marginal integrity, holding yourself to a higher standard than the people who are simply trying to make a quick buck is a great way to differentiate. I was surprised by how quickly I was able to surround myself with very solid citizens simply by being professional, honest and straightforward. Furthermore, I often get referred buyers and renters from past or present buyers and renters.
I cannot express how truly nuts you need to be to play this game and how hard it is to do it profitably. Furthermore, it is even tougher to make a go of home flipping as a standalone business as I have learned the hard way. But, markets that are fragmented, illiquid and depressed present opportunity and I fully appreciate the allure of the fun to be had and money to be made.
Editor's Note: For more information, please visit F4Designs.com.
See also: Minyanville's Housing Market Report by Keith Jurow.
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No positions in stocks mentioned.
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