Do you love TV house flipping shows? They can be inspiring and have helped many people discover the benefits real estate investing has to offer. They just aren’t reality.
House flipping TV shows have been great in many ways. They’ve definitely helped boost demand in the market. They’ve boosted spending at home improvement stores. They’ve created many new celebrities. They just aren’t real. It’s great to see all the new investors who have been driven by these shows to change their own finances, lifestyles and communities for the better. However, there are others who have quickly found out that the dream sold on TV requires a lot more knowledge and thought than advertised. Some have got seriously stuck. Here are seven ways reality is different from Hollywood house flipping, and what you need to know to avoid a financial disaster and make real money instead.
1. The Math
One of the most dangerous parts of house flipping shows is all of the missing math. They rarely include much of the real math you need to do in order to actually calculate if you’ve really made a profit or not. In many cases those supposedly big profit deals would be big losers.
Make sure you are factoring in:
Upfront marketing and labor costs to find deals
Cost of due diligence and inspections
Purchase closing costs
Legal and bookkeeping help
Holding costs until you sell
Closing costs on the sales side
Any Realtor commissions involved
Daily overhead and business expenses
2. Finding Buyers
Somehow all of these TV episodes seem to end up with an open house which results in at least one top price offer. It happens. Yet, even in strong markets it can take weeks and months to find a buyer, sign a contract and close. Every day in between means more holding costs and marketing expenses. If finding buyers didn’t take a lot of time and work we wouldn’t have Realtors any more, and there wouldn’t be all these different types of real estate marketing. The price you list at will make the biggest difference in how fast you sell. Make sure you do the math on the benefits of listing lower and selling faster versus trying to go above market and maybe waiting years to sell.
3. Timing Rehab Jobs
Obviously no house is getting completely remodeled in 45 minutes like on TV. Investors should shoot for tight timeframes in order to minimize expenses and risk, and to maximize profits. Though you’ve got to be realistic too. Know what improvements you’ll make before going in and how long they should take. This is vital for even knowing if this can be a profitable deal. It may take 30 days if you’ve really got a good system and solid contractors. Unfortunately, there are many investors out there spending many months doing this.
Real estate TV stars might spout off about some “comps,” but seem to do very little other research. To really make money you’ve got to know your local market very well. You’ve got to know sales prices, marketing times, seasonal fluctuations, rental trends, expected finishes, who your buyers will be, coming changes in market direction, how much each potential improvement can really add in appraised value, and a lot more.
5. How to Treat People
Sometimes you will have to be firm and push people to get the best out of them. You just can’t mistreat people. Word travels fast about your reputation in this industry. You’ve got to be someone others will want to work with and who pays well and on time if you want to attract the best vendors and contractors.
One of the worst things TV has done in this industry is to twist expectations. Now every renter dreams of a new home like it was just professionally remodeled on a TV show. So do end buyers. They just don’t want to pay what it costs. As a house flipper you have to know that not every repair or improvement is going to add value or help the home sell. In many cases these changes won’t even return what you invested. You can go broke fast by overimproving. You could get stuck with a beautiful home that you can’t afford to rent or sell or keep. Be careful.
House flippers on TV always seem to make money. Even when they buy a house totally sight unseen and without inspections. You can make money on buying houses you’ve never seen in person. You can make money on ugly rundown homes. Though you do have to do your due diligence, dig into the facts, and price all of the unknowns into your offer. For example; if you don’t know if the roof is good, then you have to price in enough space for replacing the roof in your offer and still making a profit. That goes for everything.