If you've watched too many home flipping shows, you may have been tempted to jump into the game. After all, the only thing better than a dramatic before-and-after montage is making some cash along the way.
We renovated our first home last winter, and we had already learned that things don't always work out like they do on TV as we prepared to put our house on the market.
J Scott, entrepreneur, co-host of The BiggerPockets Business Podcast, and author of “The Book on Flipping Houses,” knows this all too well after he and his wife turned down the opportunity to star in their own home flipping show. The experience of filming the “sizzle reel” made him realize the stark difference between reality TV and the reality of home flipping — which is funny considering he was originally inspired by watching a TV show.
In the midst of my own struggle to flip a crumbling Victorian, I asked Scott what people wanting to get into the house flipping industry should know.
1. Most flipping shows skip half the work
“A lot of people think of flipping a house as renovating, designing, staging and selling, but there's so much more that they don't touch on at all,” Scott says. “The renovating and selling part is easy. The really hard part is finding the deal, and that part usually doesn't show up. They jump right in and say, 'I just bought this house,' or, 'My real estate agent called me and he has this house I want you to look at,' and it ends up being the perfect home.”
Sure, it was because of a 15-year relationship with a real estate agent that me and my business partner were able to close the deal, but that isn’t usually the case.
I'm in the midst of restoring my crumbling Victorian home myself, so I take all the advice. Dana McMahan
The financial aspect is also often ignored on the show, and Scott says that while there are lots of ways to make money, it's not easy and requires hard work.
We learned that the hard way. When a property came up, we jumped on the purchase and started demolishing before we had financing in place. It took countless hours, three banks, and a specialty lender with sky-high interest rates to get approved for the full amount we needed. We accepted a lower amount initially while we were still searching, which meant we took out two loans and doubled our closing costs. This process continued for weeks while the house sat empty.
2. There are a lot of hidden costs
Time equals money, and Scott says this is one of the hidden costs that TV shows rarely cover: While you're renovating (and especially while you're not maintaining it), your home will have upkeep costs: insurance (homes under construction are more expensive than homeowner's insurance), property taxes, utilities, and even expenses like lawn care and snow removal.
Other costs that are often ignored on the show include loan fees, conveyancing fees, sales commissions and home warranties. Add them up, “they typically add up to 10% to 15% of the resale price of the home,” Scott says. “So, if the typical profit you make on a home flip is 15%, ignoring these holding costs could literally mean the difference between making a profit and breaking even.”
3. There are risks to looking “pretty”
“A lot of us think, 'OK, I'll go out and buy a house, and now it's all about how nice it is,'” says Scott. (I have to admit I'm one of them. I spend way too much time cruising Pinterest!) “They don't realise that the moment you buy a home, you're pretty much locked in a profit or loss. Making the right decision about your purchase is paramount.”
The show often focuses on the excitement of demolition day (which, while exciting, is only a small part of the job) and making the house look good. But making the house look good comes with two big risks, Scott says.
It can be hard to resist the urge to make everything look “pretty,” but remember that profit is the goal. Dana McMahan
“When most of us think of beautiful things, we think of expensive things,” he says, “and we tend to overspend.” Now you're running the risk of wasting money because you're not making the money you could be making.
My partner and I tell each other every day that we’re doing this to make a profit, but it’s hard to resist the urge to buy prettier appliances or fancier tile.
But the even scarier risk is losing money: “If 5% of buyers say they don't like your countertops, 5% say they don't like your accent wall, and 5% say they don't like your cool, trendy light fixtures, before you know it, you'll lose half your buyer base.”
4. Learning costs money
To be successful, you need to be good at all four elements of the property flipping business: finding clients, raising capital, renovating, and selling and marketing. Scott says if you're not good at all of these, you need to recognize the gaps and seek out professional help.
Speaking specifically of renovations, “you need management skills, budgeting skills, schedule management, attention to detail and at least a little bit of construction knowledge, because you've got to create a scope of work, get it into a budget, get it into a schedule and then manage the contractors to actually do the work,” he says.
And you're likely lacking some of those skills, at least at first. “Too many people are trying to hit a home run on their first deal and don't realize that there's a cost to learning,” Scott says. “And there's nothing wrong with paying that cost.” He goes on to say he's not advocating being naive on your first deal, but rather realizing that you might need to pay a project manager or general contractor for your first few projects.
That sounds hard, right? But if you really want to be a scalper, don't get discouraged. It will pay off “as you get better at it, learn from your mistakes, and refine your process,” says Scott. “If you do this 10, 20, or even 50 times, you might be better at it than you are on TV.”