DCIM100GOPRO
Why is it quite often you will hear someone say “it’s easy”, and to that I must add oh yeah, everything is easy for you. Well the reality of things of this and that, are not so easy. Today I read an article in the New York Times about flipping houses here is the link if you’re interested in reading the article. https://www.nytimes.com/2018/06/15/realestate/for-house-flippers-reality-meets-reality-tv.html?partner=msft_msn. Television is designed to entertain you and the producers of these real estate flip and profit from programs only show you what they think entertains you. They don’t show you the complexity of a project to purchase, renovate and then sell a property for a profit. It has always fascinated me while doing an appraisal assignment and researching the history of a property. During the period of 2012 to 2015 I really delved into the research of homes that sold in depreciated conditions and then they were renovated and resold.
I discovered in my research a couple of things that were very enlightening. One thing I discovered was the investment firms that were purchasing properties in need of repair (fixers and flippers) had a business plan. In almost every one and I studied about five separate individual firms where the business model was to purchase, renovate and then resell. In all of the cases they never added any square footage. They may have redesigned the existing footprint to conform with more modern-day purchasers’ desires. In all of the cases they used the same materials and pretty much the same designs in every home. Now take in mind that these homes were not in the same neighborhood. One in particular entity had a very specific type of home, mid-century, 1500 ft.² to 2000 ft.², 3 to 4 bedrooms and 2 to 3 baths. One thing I noticed was very limited hard scape in the landscape design. Whenever I used one of these comparable sales I always contacted the listing broker to confirm the sale and more importantly to find out how much money they put into these homes. Here’s what I discovered, they tried to keep the improvement cost to where they made a specific profit in terms of percentage of invested dollars. Each one of these entities had private placements. A private placement is where they go out and find individual investors to invest in the project and offer those investors a percentage of the profits.
Now for the individual fixer and flipper I discovered most had low returns. These are the people that think things are easy. They don’t do the research that is necessary to figure out what the property will be worth when the improvements are finished. They haven’t done the research on what it’s going to cost and the time frame to pull permits. They haven’t done the research to find out what is really wrong with the property. They haven’t allowed a high enough contingency factor for those unknown conditions. For me this is easy because I’ve been in the real estate business for over 40 years. It’s easy for me because I have seen all of these not-done research losing propositions. Most of these individual fixer and flippers made between 8% and 16% profit and most of them took 8 to 12 months to complete. Most of the entity fixer and flippers described above paid out 12% to the investors. What is the easy decision?
Brad Heavey is a Carlsbad Real Estate Appraier
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