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Foreclosure Investors Beware--House Flips Can Flop No Matter How GREAT the Deal!

How could it have happened? You wisely spent months researching how to invest in real estate. You went to seminars, read books and magazine articles showing how simple it would be in this down market to buy properties to fix up and sell or rent for profit. You may have worked with a great REALTOR® to find the perfect property or came across a FSBO that was a tremendous deal. After the closing you were handed the keys and started the hard work rehabbing the home with the hope of selling quickly: fixed plumbing, new cabinets, appliances or carpeting and repainted with neutral colors. But the home is now on the market and it is NOT selling any better. What went wrong?

dreaming Although I am aware that each situation is different, I would like to share a story of first time real estate investors gone wrong. If any part of the story starts to sound familiar, you might want to revise your real estate investment plan.

A few years ago when the market was much better than it was today, I was contacted by a couple for a market analysis on a property they were preparing for sale. I met with the owner at the vacant home. She was extremely excited because the home they had bought as an investment was almost ready to list. It had new flooring, paint, carpeting, cabinets and countertops in the kitchen and bath. I casually asked, "what made you take on this huge endeavor?' The answer was quick, direct and sincere, "We are going to make a ton of money!"

So much for the best laid plans...I prepared the market analysis and came up with a market value around $300,000. When I shared the amount with the excited flipper, it was met with dismay and I did not get the listing. About two months later the home was listed for sale by owner for $349,900; about 12-15% higher than I recommended. Remember, the market was better than it is now and so there were some who thought that an aggressive price would sell. I decided to keep an eye on this house to see how the first time investor would fare.

It did not go well, I'm afraid...The home was re-listed in August with a REALTOR® . But on closer inspection, the REALTOR® was none other than Mrs. Seller with a brand-spanking new real estate license. Sometime in October the home was reduced in price to $299,900 I had suggested in the spring. But the summer selling season was over. Minnesota had entered a serious slowdown in the market. Finally, the listing was cancelled in November.

A year later, I noticed the home relist again. This time the flippers let someone else take a shot at selling the property. The price was now $269,900 and the infamous wording, "Needs TLC" was added in the comments. The home did sell a couple of months later as it now marketed by an experienced agent.
So what happened? Based on my experience and what was going on in the market, I think these new investors attempted to be landlords when the home didn't sell for the price they wanted. Renters can be very rough on homes and after rehabbing once, maybe they just didn't have the heart, or funds, to try again.

In my estimation, this couple may have just broken even but more than likely lost money. They had originally paid $240,000 for the home. They probably had invested a minimum of $7,000 in materials on the repairs that were originally outlined when I viewed the home for the market analysis. The home actually sold for $267,500 with the seller contributing $7,500 for closing costs. Add in a modest 5% commission of $13,000 (though it was more likely 6 or 7%), they may have broke even.

This is not an isolated case and I am certain that flipping bug is going to bite many a newbie investor as more and more foreclosures hit the market at extremely attractive prices. There is money to be made investing in real estate, but keep your expectations realistic. Work with (and listen to) an experienced REALTOR® when selecting a property to invest in. Be wary of neighborhoods with several foreclosures even if it is a great deal. Do a thorough cost analysis of the project and compare to an estimate of what the refurbished home will sell when complete. Keep in mind that the market is always changing and plan accordingly. Have your REALTOR® update the market analysis just prior to listing the home. If the market has changed, you will have to price the home lower. Buyers are much more savvy and will not overpay in this downmarket. Treat your investment like a business and stop dreaming of a "ton of money". If you don't adapt to the changed market and you price the home too high, it won't sell.

Real Estate investing can be profitable but it is not for everyone. If you are not prepared to work with professionals, listen to their advice, keep abreast of the market and change with the times, it may be best if you invest elsewhere.

If you are buying, selling or relocating to Minnesota and need help from a professional REALTOR ®, give me a call or visit my website for FREE Relocation Packet or Homebuyers Success Packet. I specialize in acreage and lakeshore properties in the north and east Twin Cities metro area including Ham Lake, Lino Lakes and all communities in the Forest Lake School District! Serving Anoka, Chisago, Ramsey and Washington Counties in Minnesota.

Buying a Home? Check out my new HOME BUYER'S BLOG!

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If you are buying, selling or relocating to Minnesota and need help from a professional REALTOR®, give me a call or visit my website for a FREE Relocation Packet, Homebuyers Success Packet or sign up for Listingbook Twin Cities Home Search. I specialize in acreage and lakeshore properties in the north and east Twin Cities metro area including Ham Lake, Lino Lakes and all communities in the Forest Lake School District! Serving Anoka, Chisago, Ramsey and Washington Counties in Minnesota.

Buying a Home? Check out my new HOME BUYER'S BLOG!

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Subscribe to Teri's Notes & Anecdotes on Twin Cities Real Estate by Email

Posted by Teri Eckholm, REALTOR® Anoka County Acreage & Lakeshore Homes on 02/13/2009 09:22 AM

Comments (46)

House Flipping in the Real Estate Investing Channel

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Originally posted at: Twin Cities Real Estate Blog: Foreclosure Investors Beware--House Flips Can Flop No Matter How GREAT the Deal!

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46 Comments on Foreclosure Investors Beware--House Flips Can Flop No Matter How GREAT the Deal!

FEB

With the current downturn in the real estate market, flipper has drowned.

Glen--I have been getting several inquiries by first time investors about buying and rehabbing foreclosed homes in certain areas. Some want to flip and some want to rent. Flipper may be on life support but isn't quite dead yet. However it is more important than ever to invest wisely with expert advice.

We have had a few of those experiences in one case a 10,000 surprise with black mold that the inspector missed. The greatest deals in the world may turn bad quickly.

FEB

Terry--Exactly! In this market so many might be enticed by low prices into the market but even the most experienced and thought out plan can go awry.

you have to have a lot of courage (and maybe a lot of something else) to get in to this real estate market and start "flipping"

Yikes it looks like these guys screwed up every rule in the book. I bet they never make the same mistakes again. If they had listened to that professional Realtor they met with in the beginning none of this would have happened!

James--Maybe flipping is not the word...but investing would be. I think people that are considering the investing in real estate don't expect a quick flip but it is the term that many think of when buying and rehabbing a home. These days it is more like waiting for a bond to mature. Rock bottom pricing on very nice homes makes people consider these options.

Not just in MN either...In Forbes a month or two ago, there was an article on an very successful investment team in San Diego that is currently buying, rehabbing and renting homes. When the market comes back in five or ten years do you think they will continue to rent them out or sell?

Bill--These low home prices will entice people to consider jumping into investing again. Best done with the assistance of a knowledgeable expert and realistic goals!

We're still rolling flippers in parts of Sacramento, but holding power is important. Without it, an investor could easily lose. I had a client try to flip a home in Land Park last year. I told him he was priced too high but he insisted he knew better than I because, after all, he had gone to open houses. It's now rented.

Goodness the cost of selling included the cost of real estate school too? Because selling real estate is so easy anyone can do it? Is she still a real estate agent? Great story.

Teri,

Any savvy investor should know that when they buy a property whether to rehab or not better make sure they have a lot in reserves because they might be carrying it for a long time. Even renting might not be a great option when the market rate is lower than their outlay. I've bought quite a few in my time and most of them were during a good market but I have one right now that we can't sell so we rented it and at a reduced rate. Thankfully we don't have a mortgage on it so it's less stressful but there are expenses to be paid. I usually try to forecast at least 1 yr in reserves...maybe even more right now in this market.

Great story...I wouldn't want to try and flip a house in this market, unless you get it at a very low , lows price.

As with any investment one has to know the market. Now is not the time to be flipping homes. The long term investor will win big in this market. Buy the foreclosed home, rehab, get good renters and good cash flow going on it, THEN look to sell it in 10 years or so. Speculation is what keeps getting us in trouble in this country. Whether it be stock market speculation or real estate speculation. The idea of the quick buck and get rich quick schemes have got vanish from our society if we are ever to enjoy sustainable long term economic stability in this country. And I classify "flippers" in that category of speculators. Good post, good lesson learned on the subject party's part, and best of luck in 2009.

My advice these days to first-time investors who want to stick their toes in this market is to only do so if they are prepared to become a landlord. There are many who have become accidental landlords.

silly people....flipping is for fish

I guess that's why you really need to purchase the homes at a big discount. You never can be certain what the future will be. You need a big cushion to absorb those risks.

Lots of good points. Before becoming an agent, I (flipped) better said rehabbed ove 20 properties. Most of the deals were good. Lost money on a couple. One of my mentors told me in the first few months of my endeavor:

"You make your money when you buy"

My words at this time, is "due diligence" "due diligence"

Let the professionals do what they do best.

Teri,

That is true. There are still great properties out there to flip, though few and far between. You have to always remember a "slush fund" for the unexpected. Even the best can have one or two go wrong. Being the most prepared is the best you can do.

On the other end of flipping, I have a buyer who desires to purchased a flipped home. We wrote the contract in October with a pre-occupancy due to the fact he was going FHA and they have the 90 day rule.

It was suppose to close the end of January. The lender didn't get the closing docs out in time, and to justify their error they started picking apart the deal! It gets better. They decided they want a brand new contract dated after the 90 days would be up. Everyone agrees and we get a new contract. Yesterday, the underwriter calls the seller and now wants justification for him buying it at $60,000 less than what he is now selling it for even though they have already required 2 appraisals which justified the price! Is this not way out of line for a lender?

Even FHA?

The term "flipper" has developed a bad reputation the RE world. Better to say "rehab investor" if that is what they are really doing (as in this case). Buying at a discount, fixing and reselling for retail. For the professional rehab investor, now is the PERFECT time to 'flip' homes (of course, you have to know your particular market). The Pro understands that trying to get top dollar is secondary to moving the home fast.

A good investor will buy problem homes (that reduce the value of all homes), fix them and resell them for MORE (better for all homes).

A new investor can be professional as well. One of the keys to successful investing is fully understanding your local market. Another is using the services of a professional agent that understands your type of investing and can help guide you in your decisions on the deal.

And it's always good to have a backup plan. Renting/landlording is one.

Now is not the time to be flipping. Now is buy and hold time.

Get these good deals and make sure they'll cash flow. Be sure to include on going repairs costs in your estimates.

You *will* be able to sell for a nice profit in ten years....

I agree with Robin. I see a ot of investors buying places up with the intentions of holding onto them for at leat 2 years. Just be ready to be a landlord!

It's very common for first timers to lose money, most see the re-runs of "flip this house" but fail to realize that the episodes they are watching are from 3-4 years ago. Most buyers and sellers need some type of reality check along the way. Investors are no exception.

Teri, it can be tough as an investor if they don't have their numbers squared away with market realities. Many shoot to buy at 60 to 65% of market before rehabbing. You can get "stuck" if you buy at the wrong price.

I've seen some successful quick rehab projects in our area in the last 6 months. In most cases they are contractors who are able to pick up a property that the average homeowner shouldn't undertake. The contractor can come in with a crew, strip it down to the studs and rebuild it in 30 days or less. It is actually great for the neighborhoods where it is happening as it starts to raise the value and get a property off the market that could have lingered for a very long time.

The new stage we see are the amount of new real estate investors jumping into the market to be landlords without being prepared of what it actually takes to be a good landlord... and find good tenants. Especially in this economy...

I wouldn't suggest flipping right now. I would also be very careful with renters and check references. I have seen some rentals look worse than bank owned homes!

The market is off the charts for everyone. Take at look even at appraisals they are up and down. Buyers are low balling and the market just keeps falling.

Those "flip this house" type shows are definately responsible for many of the foreclosure and short sale homes on the market right now. They sure make it look easy on TV!!

Teri, Great post. I have seen this here and in the "old" market the homes went very well. Now they are not being purchased much no matter how great the deal is. This couple learned a few lessons..the hard way.

You are so right... with the current situation with mortgages and the banks.. it can be rough a little longer for any home buyer and the investors

FEB

wow, I see this all the time. Like yourself, I keep an eye on listings I didn't get because they didn't want to hear THE TRUTH. Most of them are still on the market today for lower than what I suggested one-two years ago.

Teri,

If this couple had listed with you early on they had made some money, not a ton of money. They chose to chase the rainbow and look what happened. Knowing the real estate market is imperative for investors.

FEB

Teri I had one identical to yours last year except the seller didn't go through the license step - it finally sold for 30,000 less than I told them in 2007, Karen

Teri, I think too many investors have no desire to hear what is real...only what THEY want to hear. ;-)

That's quite a story - and so foolish. The crowning touch is the seller getting a license in order to list the home herself at a fantasy price. During the boom people thought it was "easy." Too many flipping shows on TV fueled the fantasy. But seriously, how much time,money and energy was wasted on the notion that they were going to make a "ton of money"? Sad.

FEB

Elizabeth--Real estate investing takes education and plan alternatives even for the most experienced. Your example underscores this.

Maureen--I don't know...I meant to go and check our MLS roster this weekend but got sidetracked. At the time it was relisted, she had yet to sell anything so I am guessing the license is inactive.

Neal--Sounds like you have a smart plan but good point; there are no guarantees. The Forbes article I was reading about the San Diego investment group said they stay away from the real bargain homes in areas where there are many foreclosures. They chose neighborhoods with few rentals with strict criteria. There is no perfect answer and planning for a loss is very important as there is no sure thing.

Rebecca--I think the low prices are enticing a few newbie investors like my example CMA person here. No sure thing even when the market was good. No matter how low the price paid was. :)

Jerry--I don't think "flip" is the correct word anymore...more of a buy, rehab and wait for the investment to mature. If it does sell great. If you can rent, do. But don't expect anything to flip in days, weeks or months...plan for years!

Karen--Anyone considering investing today shouldn't become an "accidental landlord". It should be part of the plan!

R.A.--Good point! :)

Tim--When you look at how some other investments are performing, real estate is as good as any other as long as you buy low....Prices are low. And are realistic about what the return is and be prepared to get less.

Tere--Smart mentor you had...Due diligence is one of the most under used concepts by newbie investors!

Ryan--There are some very good investments in our area. But there are no guarantees on anything. It is important to enlist and listen to the experts around you when buying, rehabing and pricing to sell (or rent).

T.C.--Lots of underwriters are questioning everything. In some areas, that home might have been the only comp in the past 90 days. I think short term flipping is going to have more and more problems as you have described.

Roger--Flipper gets the attention and is the term that will get the most SEO punch for internet searches but your description as a rehab investor is more accurate. It is not an easy job to rehab and the investment is not guaranteed. But few investments are these days. Those looking for pie in the sky, quick, easy money really don't want to invest in a foreclosed home these days. Maybe they never should have.

Robin--Exactly. The market will come back. Some markets may come back in less than the decade you predict, but some might need the whole ten years. Just like our 401Ks.

Brian--Two to 10 years holding time is a good estimate in my book too...Look at TC's comment above. Underwriters question homes sold for more when they have been rehabbed and resold in 3-4 months.

Doug--Hopefully they are working with a professional REALTOR to make the buy who will advise them on how long the resale time will be and to have an alternative plan to live in or rent out the property for a few years. Some are buying these foreclosures without representation and flipping reruns in their heads. Big mistake when they go to sell.

Gary--Wrong price. Wrong neighborhood. Bad advice. So many ways to get stuck if you are not informed.

Cindy--That is the right way to do it! Contractor buys. Crew rehabs. But they have to buy smart and I bet they make their mistakes but are smart enough to cut their losses quickly rather than hanging on to outdated values.

Paul--Good tenants can be a big problem in many markets right now!

Kristi--It is sad to see beautifully rehabbed homes trashed by renters but it does happen. I don't recommend newbie rehab investing but there are good deals for those prepared to rehab and hold. Understanding how to find a GOOD renter is a very important part of the process.

Charles--It would be tough to start a rehabbing business right now. It is not for those who jump in unprepared.

Mike--Flip this House reruns are going to cause problems for many.

Carole--It isn't as easy as it looked on TV that is for sure. If they had just listened and priced it right, they could have made some money rather than losing it all.

Roland--The investors have to be very smart right now...planning to hold on an investment (and having the funds to do it) should be part of the plan.

Jennifer--If people would just listen to us! :)

Esko--Exactly...Knowing who to listen to and understanding that the information might not be what you expected when you purchased as the market is constantly changing is essential.

Karen--They were lucky it sold rather than go to the bank like I think this one did...In a much better market no less.

Teri--Professional investors listen to the experts...Novices listen to no one unless they confirm what they "think" they know. :)

Ruthmarie--I actually felt a bit sorry for this couple as the lady seemed nice, though naive. Didn't like that they wasted my time doing a CMA without telling me she was going to get her own license but still hate it when someone who really can't afford to lose, loses big. So many sad stories out there.

FEB

Hi Teri,
There has always been "flippers" (they just got a new name) and there always will be. But as you said in this wonderfully, written post---one must be educated in all aspects of the process.

Cynthia--Agreed...Always someone trying to make a fast buck in any and every business. The smart ones make informed decisions!

FEB

Teri, what a terrific post! It seems like it's such a great market for people who are buying a home to live in, at least for a while, and so scary for everyone else. This isn't a market I would try to flip anything in!

FEB

Pat--In our area there are some flip-tempting prices but investors need to have a plan B in case it takes longer than anticipated to sell. Glad you enjoyed reading!

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