by Ashley Turner
on Friday, November 30th, 2018 at 1:43pm.
These days, the concept of flipping homes in the real estate market seems to be more prevalent than ever. More and more people with little to no experience in the field are jumping in head first without fully knowing what it takes to succeed. Between the tv shows that make it seem like a flip can be done over a weekend, and social media advertisements for flipping programs that can be learned in two weeks, it's starting to have a very casual feel to it, when the reality is quite the opposite. Basically, it's not impossible to flip homes for worthwhile profit, but it's very difficult and I'm going to list some harsh realities you'll have to accept if you are seriously pondering giving flipping a shot:
1. Low profits and high risk. The numbers seem nice at first glance: "Hey we can make $40,000!" Right on. That's not small money for most of us, and a big reason why flipping is so enticing. But let's talk about that $40,000 for a second. Is it really a lot if you have to invest $600,000 of your own money to make that? That's not a great return, not even 10%. Most retail businesses shoot for 40%-50% gross profit margin, flippers are hoping for 10%. And the risk is extremely substantial. You are relying on a lot of people in a variety of areas, and even one miscalculation or screwup, and your already thin margins get damaged further. If you value a home incorrectly at all before you buy it, you are doomed from the start. And there is always the concern of what lurks beneath. You can do all your due diligence as a flipper before the purchase is done but truthfully you won't know what a home is about until you open up the walls and expose the guts. Unforeseen problematic areas in the internal areas of a house can completely warp your margins, a sizable risk considering there isn't really any way to explore this properly prior to purchase.
2. And let's talk about the costs. Oh, you know some friend contractors who will do it for cheap? That's awesome. Are they good? Will they take shortcuts that will scare buyers away? Even if they are wonderful, there are a ton of costs many flippers don't even consider when they are running numbers, everything from permits to lawyer fees. If you do get into the flipping game be sure to examine all the appropriate costs, not just the building ones.
3. Flipping homes is often described as passive income. While there is some truth to that in regard to the finished product, flipping itself is far from passive and requires a ton of hands-on work. Half the work of a flip is finding the right one in the first place, which generally takes months, not days/weeks to find the right one that makes sense. Once you find the deal, you have to line up funding, develop a scope of work and get contractors’ bids. Not only do you have to put together a scope of work, but if you’re good, then most projects will require several different scopes with various levels of renovations, and then you have to determine what the home will sell for at the different levels of renovation. Then you determine the option that maximizes profit and proceed accordingly.
4. Not saying this is for sure the case for you specifically, but chances are you probably don't know enough about flipping to actually fip. Flipping requires a fair amount of knowledge in a ton of small areas. Construction is a valuable skill to have, but I see a lot of contractors get into trouble when they try to flip homes because they over- or under-improve. There is an achievable balance there but it's very hard to strike in many cases. I imagine if most people knew how little they actually know before they tried a flip, they never would try in the first place.
Yes making $50,000 after four or five months feels pretty good, but how about making nothing after four or five months worth of work, or losing money, both of which are quite common in the flipping world? None of this should read as me arguing against everyone flipping homes, but I do hope it reads as a cautionary warning - these are precarious waters to go into, and should never be entered into lightly. And if you do, by god please include a realtor in the process from start to finish. Far too many cut out the REALTOR® from the early parts of the process and expect them to correct a disaster when it comes time to sell, often with very unrealistic profit aspirations. If you have any questions on this or anything to do with real estate in Saskatchewan, please don't hesitate to give us a call.