I have been flipping houses for over a decade, and it has been a great source of income. I run my fix and flipping business with the most integrity I can, but house flipping has a bad reputation in many circles. There are many reasons people think poorly of house flipping and people who flip houses mostly because of a few investors who don’t operate with integrity. There are some great people who flip houses and some people who take advantage of people to make a quick buck. Unfortunately the small minority of flippers who don’t treat people right give the rest of us a bad name.
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Does house flipping deserve to have a bad reputation?
If you look at the very basic idea of house flipping you can see why it gets a bad rap. An investor buys a house below market value, fixes it up and sells it for a profit. Since the investor is making a profit on the sale of the house, people may assume the seller of the house sold the property too cheap and was taken advantage of. In some cases a seller is taken advantage of by an investor, but most of the time there are very good reasons why houses that are flipped are bought cheap.
- Many times a seller wants to sell quickly because they need money or for other reasons. They may value a quick sale more than getting the most money they can for a house. Investors that want to fix and flip a home often pay with cash and can close very quickly.
- Many houses are sold as REOs or short sales where the bank is the owner of the home or deciding what price they will accept for a short payoff. It is not the person who bought the home who is losing money, but the bank that financed the property. Banks may be willing to accept less than market value to sell a house quickly to get it off their books.
- Many house that are flipped are in need of repairs and some need massive amounts of repairs. If a house needs repairs, there is a great chance it will not qualify for financing, which will eliminate many buyers and the buyers who typically pay the most for a house. When houses need a lot of repairs, investors are usually the people who can purchase the home and for them to take on the risk and time it takes to make repairs they will need to buy the home at a discount.
Do house flippers make much money on each deal?
In 2013 according to realtytrac.com the average gross profit on a fix and flip in the United States was $58,081. $58,081 is a lot of money to make on each fix and flip, but this is gross profit not net profit. The $58,081 is not taking into consideration buying costs, selling costs, carrying costs or repairs made to the property. There may be some cases where minimal repairs are made on a fix and flip, but in most cases an investor is spending 10’s of thousands of dollars to get fix and flips ready to sell. Realtytrac also states in their article that most of the high profit fix and flips are expensive houses that are much riskier to flip. I wrote an article about how much it costs to repair and sell a fix and flip.
Depending on what type of financing you are getting on a fix and flip, the costs can range from $17,093 to $30,850 is needed just to take care of the financing, carrying, buying and selling costs on a fix and flip that sells for under $200,000. That means the average profit went from $58,081 on a fix and flip to -$27,231-$40,988. That is still good money to make on one deal, but we have not factored in any repairs. I usually spend at least $15,000 to repair a fix and flip and many times I will spend much more. The net profit on a fix and flip is most likely around $12,000 to $25,000. Fix and flip are not always bought and sold quickly either; it can take me 6 months or more to complete a flip.
How much money are sellers losing by selling a home cheaply to a fix and flipper?
As you can see there are not always huge profits involved in fix and flipping. I think it is much more profitable for a fix and flipper to have many deals going at once than to try and make a huge profit off of one deal. It is not likely that a fix and flipper is stealing a home from a seller to make a profit. The fix and flipper is making repairs and adding value to homes and taking on a huge risk as well. Many fix and flippers went bankrupt a few years ago when the housing market crashed. Many fix and flippers under-estimate their costs and lose money on their first deals. When you see a huge margin between the buying and selling price of a home, it does not always mean the seller was taken advantage of. Remember if the flipper does not make those repairs, market and sell the home; the original seller will have to do all of those things to get the most money. Most sellers do not have the money, time or experience to manage renovation projects on homes or know where to best spend the money.
For more information on how to fix and flips homes including how to find properties, how to finance them, how to repair them and how to make the most money fix and flipping, check out my new book Fix and Flip Your Way to Financial Freedom. The book is $9.99 and available at Amazon as a 171 page eBook here. You can also buy a PDF version of the book in the InvestFourMore store here.
Do home sellers get taken advantage of by fix and flippers?
Even though I believe most fix and flippers are honest hard-working investors, there are some flippers that take advantage of sellers. One way fix and flippers are able to buy homes below market value is by using direct marketing campaigns to contact sellers. Direct marketing involves sending mail to home owners that do not have their home for sale, or marketing to home owners with billboards or signs. Direct marketing in itself is not a bad thing, but investors have to be very careful, because when a home is not for sale on the MLS, the house is not being exposed to market pricing.
If a house seller has no idea what their home is worth and an investor offers that seller 30% of the current market value I think that may be crossing the line ethically. I do direct marketing myself, but I always disclose that I am a real estate agent. If I end up buying a home through direct marketing I am very honest about what it is worth and I disclose in writing that I may be buying it below market value and I may profit on the deal. If you are a house flipper I think it is always smart to disclose these items and if you are a real estate agent as well it may be required by law.
Do fix and flippers help improve neighborhoods?
Many people do not think about the good fix and flippers do when they flip a house. Fix and flippers make money by repairing homes or adding value. It is true that they buy houses cheap and there is a small chance that could hurt prices in a neighborhood in the short-term. However when a flipper repairs a house and puts it back on the market, they are selling it at a very high price. This sales price will help the neighborhood and house prices in the area. If you are worried about the effects of the low price the flipper bought a house for, it usually does not hurt house prices very much. Appraisers and real estate agents who help determine value for sellers can see houses that were bought by flippers were distressed and needed work. Most appraisers will not even consider these properties when doing appraisals, unless they are appraising a home in similar condition.
Fix and flippers also take an eye sore or a vacant property and make it look nice. A fix and flipper can turn a house around in a few months or less, because that is what they do. They then usually sell the house to an owner occupant buyer who will take care of the home for years. If that same distressed house was sold to an owner occupant, they may not have the money, time or resources to repair the home in a timely manner or ever. If the home is sold to an investor who is looking to hold it as a rental, that investor may not repair the home as nicely and tenants may not take care of the home as well.
Do house flippers help to improve the economy?
Not only do house flippers help improve neighborhoods by making ugly houses look nice, but they also help the local economy. When I fix and flip a house, I will use many local contractors to repair the home. I have flooring companies install the carpet, I have local contractors paint, repair walls, install kitchens, I have local roofers repair and replace roofs and I use local plumbers and electricians. All this money being spent on repairing a house is going back into the local economy.
House flippers can make a lot of money, but they can also lose a lot of money as well. It is a risky business and to make sense for people to flip houses, there needs to be rewards. Most successful flippers do not make money by taking advantage of people, but by adding value and doing multiple deals a year. House flippers also help to improve neighborhoods and house prices by renovating houses and selling them for the most money they possibly can.