By Steven Pescatore, Author of Flipping Houses – Is It for You?: Learn the Good, the Bad and How
“To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity”. ~ DOUGLAS ADAMS
“I Can Do That”
Have you ever watched those “House Flipping Shows” on TV and said, “WOW, that looks so easy, I can do that?” Then you decide to give it a try and find out you don’t know where to get started, or you do and then lose a lot of money?
This happens with new investors all the time; they turn on the television to watch a “Flipping Show” where the couple makes tens of thousands of dollars and gets the real estate investment bug.
The truth is, this business can bring high returns but can also bring tremendous losses. Keep in mind that this is reality real estate with real money, not reality television, where the show is edited to make this look easy.
I attended a real estate seminar where the instructor starred in a reality “Flipping Show.” The premise of the show was a single mom buying and flipping homes. If you watch the show, the director made her look like she was doing all the work herself. When in reality, she did none of it! She let us in on the show’s secret; the director would have her hold a hammer, hold a paintbrush, then cut the scene and bring in the pros to do all the work. If this business were as easy as shown on television, we would all be real estate moguls.
Being a real estate investor myself, I have to say I enjoy watching these shows. It brings great satisfaction watching an old, deteriorated home being transformed into a beautifully decorated showpiece. Watching to see how much they get the property for, how they decorate, what changes they make, and the grand finale-how much money they made.
At the end of each show, no matter which it is, they all show basic investment accounting: “We paid $200,000 for the house; put $50,000 in construction; sold the house for $350,000 and made a profit of $100,000!” Wow, that is amazing! Right? Well, the problem with this is their presenting gross profit only, not net profit. What they are leaving out are the “HOLDING COSTS.” Holding costs could be an additional 30% or more of the total project cost!
Not to mention, Uncle Sam wants his cut as well; capital gains and state taxes can be another 25-30%.
So instead of a profit of $100,000, it would be more like $30-40,000. Not a bad profit but not precisely what is conveyed to the viewers. They need to glorify the outcome so viewers are astonished and will keep coming back week after week. If they were truthful and showed the actual outcome of $20-30,000 profit, it may not be as astounding.
It’s very rare if ever they show a loss. What they will say is, “after one month on the market, we still haven’t received an offer and lowered the price by XX dollars.” In TV talk, that means they did not sell the house for a huge profit and may have taken a loss.
Also, what they fail to mention is that the characters in these shows get paid a per-episode fee. Do you really believe they have the time to find and manage all the properties they are flipping and do a show? Not without a lot of help.
These shows have really glorified the real estate investment business and made people believe all you need to do is find a property, fix it up and make a huge profit. As in the example above, in truth, it is reality television made to look easy, where they can cram entertaining content into a 1-hour show. When in reality, that is the farthest from the truth. These shows do not give the detail that goes into how difficult the process truly is.
They don’t tell you or explain how many houses they placed offers on before one was accepted. How the funding was obtained actually to purchase the house or, as mentioned, what the holding costs were.
Have you ever seen a building inspector visit the project site and fail an inspection on these shows? That part was left on the editing room floor. Or do they mention going through the building permit process or zoning? You don’t hear about these things because it is all done behind the scenes prior to shooting the show by many of the production assistants.
I can assure you it is not as easy as these shows make it seem. You may spend countless days and nights searching for properties. Then you will make offers on 15-20 or more properties before one is accepted that meets your criteria. Unless you are extremely wealthy and have a large amount of cash in the bank, you will need to get funding to pay for the property and the rehab.
The construction process can take weeks to months to complete a rehab project, depending on what repairs need to be done or if you are changing the layout of the home and adding more space. Having some knowledge of this process is paramount to flipping a home.
Before committing to a home rehab project, you need to ask yourself these questions, “Is Home Flipping for Me?” “Do I have the skills or knowledge required to complete a project from beginning to end?” “Do I have the time in my daily life to spare?” What are the requirements to run this type of business?
I am not writing this article to discourage or dissuade you from going into the real estate investing business, but to give you an insight as to what you should expect when taking that leap. Points you need to know and some of the pitfalls you may come across along the way.
There is a lot that goes into buying and selling properties; if you decide this is something you want to do; you need to go into it with your eyes wide open. Again, I am not suggesting you shouldn’t do it; what I am saying is you must understand the process and educate yourself before giving it a try.
About the Author
Steven A Pescatore, Owner/Founder is a Consultant, Real Estate Investor, and Real Estate Sale Agent. He spent over 3 decades working in Corporate Real Estate as an executive for several Fortune 500 companies and has over 20 years’ experience in residential Real Estate. Steven assisted dozens of clients with strategy, execution, and project management.