The HGTV shows about flipping, remodeling and furnishing make transforming a home for a good investment look easy. Buy a house in need of repair for a modest sum, roll up your sleeves, bring in experts for tasks you can’t handle, add furnishings and voilà! The house has become your version of Cinderella. Just wait for buyers to come, so you can recoup your investment dollars and sweat equity in no time. With profits in hand, you’re ready to undertake your next transformation, maybe more than one or in a different economic category.
Yes, flipping is still very much in vogue. More than 207,000 homes and condos were overhauled and sold last year, the highest number in 11 years, according to a report from Attom Data Solutions. The national property data warehouse organization, based in Irvine, Calif., defines a “flip” as a property bought and sold in the same 12-month period. In addition, the total volume of financed home flip purchases was $16.1 billion in 2017, up 27 percent from $12.7 billion the year before, and a 10-year high, according to Attom Data Solutions.
But the downside to so much interest in flipping is that there’s greater competition. The number of flippers has increased to 138,410 in 2017, up 4 percent from 133,407 the year before and the highest level since 2007, according to Attom Data. The average gross return on investment was down to 49.8 percent from 51.9 percent in 2016, also according to Attom Data. And certain markets are experiencing much more flipping than others—Buffalo is up while Los Angeles is down, also according to Attom Data.
Before you see stars in your eyes and envision yourself as the star of another Reality TV show, it’s time for a dose of actual reality. We got ours by talking with Rodolfo “Rudy” Cortes, COO of Flips Operations at Aperture in El Segundo, Calif., who estimates that he and his team have flipped more than 3,000 homes over the last 15 years. Here is what he shared with us in nine helpful lessons. NOTE: His replies have been edited and condensed.
#1. Competition has increased in certain markets. When you speak about flipping, you need to talk about different markets since conditions vary so much; real estate overall has become hyperlocal. There are more people involved in flipping so it’s more competitive overall. It’s become sexy and the cool thing to do in some places. New investors keep entering the market and driving up prices. But it’s harder in other markets where there’s limited inventory and too much money chasing deals.
#2. Demand and growth in population help lead to success. These two factors make a market ripe for flipping. Our goals are to get a 20-percent return on investment within four to six months. We’re not in California for this reason but are in 11 other markets where we can do that. Numbers for the purchase, amount needed to invest, and what you can expect to resell the house for are different depending on the house and its condition, the price range you’re in, and the geographic market. We focus on entry-level homes for first-time buyers because of the lack of affordable housing in the markets we entered. These houses need work and we turn them into beautiful but still affordable housing. We want buyers to move in and not worry about a water heater conking out or wiring needing to be replaced or a roof leaking and also needing to be changed. We shy away from luxury homes and avoid over-improving a house. In Austin, one of our markets, we might be able to buy a house for $200,000 and resell it for $300,000 while in Nashville we might be able to find one for $180,000 and sell it for $290,000.
#3. The secret is in the data and analytics. Our company model is different than other investors’ models who may be new to the market or represent Mom-and-Pop businesses doing one flip here and there at a time. We are driven by data and analytics that indicate when to enter and exit. I can’t give away too much of our “secret sauce” but we know, for example, that the flip market is peaking in Los Angeles, so we don’t do flips there.
#4. Remodeling needs to be focused. We focus on the typical upgrades that buyers look for in entry-level homes. In a kitchen and bathroom, they want to see new flooring, cabinetry, countertops, appliances and paint. Most of our homeowners today want hardwood floors, too, so we’ll add laminate wood flooring in most of the living spaces. We won’t, however, undertake more expensive, extensive redos and rip down a house to the studs and subflooring and replace all the mechanical systems, which you might see on some TV shows. Though outdoor living space is important, we don’t over-personalize it but prefer to give buyers a nice blank slate with some privacy—maybe, a fence and a nice deck. But we wouldn’t add a fire pit. It’s hard to know a buyer’s exact taste so it’s better to err on the side of minimal changes. We aren’t influenced by trends at the top of the luxury market.
#5. Regional variations arise. Certain regions prefer earth tones while others like white and the new grays. Some buyers want quartz while others are okay with granite or even laminate for countertops. These types of preferences also change—usually every three to four years is a new cycle—so we must stay on top of that. We must know the regional preferences of where we’re working.
#6. Time frames sometimes veer off track. Not everything is as fast paced and successful as it appears on TV shows. The reality is usually slower. We make a projection at the time of purchase, but there can be delays once we start rehabbing. Today, for example, our appliance vendor couldn’t deliver to one home, so the time frame will be a week longer. Weather can also affect deliveries and work. So, can availability of supplies and back orders. Likewise, there could be a problem with a workperson—a contractor, electrician or plumber who doesn’t show up or leaves with the deposit.
#7. Virtual rather than real staging can work well, too. We don’t need to stage a house with furnishings these days since technology is available to do virtual staging. People can walk through a home and imagine it furnished if we show them the right software. What’s more key is to get potential buyers in through that door.
#8. Watchers beware—some TV shows inflate the facts. Some shows make flipping seem easy, which it’s not. We advise potential investors not to get into this business unless they’re ready for unforeseen circumstances and to understand the practice isn’t about earning easy money. The shows don’t show the money you have to put down and how long you must wait to realize a profit. Their goal is to attract viewers and achieve strong ratings. We want people to be aware of the downsides. You could get involved in a legal altercation and lose a deposit, or your rehab may be slowed by a city stopping work due to a permit problem. There are all sorts of moving parts and challenges that the shows don’t share with their viewers.
#9. Get good grades by doing your homework. Talk to other investors in markets you’re considering. Find out what they’ve done and learned to achieve success. Read books and take courses.
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