If you're as obsessed with HGTV as we are, it's understandable that you've fantasized about quitting your job and reinventing yourself as a Fixer Upper-style home improvement superstar. I mean, who doesn't want to be the next Joanna Gaines or Leanne Ford? But if dreams are quickly outpacing reality, you might want to think twice before diving into the home improvement market. The shows tend to downplay the less glamorous parts of the process (like fixing your HVAC system), bend time and space constraints (you do this all in a week?), and price labor and materials at rates not typically seen this century.
Did we mention we're on the brink of a recession? We spoke to home flipping experts to find out what it takes to turn a house into a profitable one, the hidden costs and dangers, and why now might not be the best time to give it a go.
The Big Picture
There's a reason the best people to flip a home are those with experience in adjacent fields, like real estate brokers, general contractors, and designers. They know best what it takes to build and maintain a home, both in terms of labor and material costs associated with major renovations, and their expertise can offset some of the costs in the process. For example, a real estate agent can save up to 5% on the seller's commission. Designers and contractors often source materials at wholesale rather than retail price.
“Most real estate agents tend to focus on aesthetics, but flipping property requires a lot of skills that people don't think about,” says Christopher Totaro, a former contractor who flipped homes before becoming an agent with New York-based real estate firm Warburg Realty. “It requires real estate market knowledge and a deep understanding of the construction process. And you have to make decisions based on what the market wants, not what you want.”
In fact, home flipping veterans say the most common (and costly) mistake first-time fixers make is underestimating the scope of the work. “Unless the buyer is a skilled home inspector who can make quick judgments about plumbing, heating, electrical, flood zones, community board issues, asbestos, carbon monoxide, water pressure, windows, appliances, and a variety of other factors, disaster is almost guaranteed,” says Totaro's colleague Gerald Splendore. Totaro adds, “If you're relying on a contractor to know whether something will work, you're getting yourself into a situation that's out of your control.”
Industry professionals are also well aware of the red tape and local guidelines that often slow down projects, and how to get around them. “I recommend visiting with city planners and reading your city or town's construction guidelines,” says San Francisco designer Allison Pickert. “Some areas may not allow weekend work, which can lengthen construction timelines.” And that can affect your bottom line.
Contractor Wanted
When it comes to contractors, reputation comes first (meaning if you have a contractor who gets the job done on time and within budget, their reputation is worth gold). Complications always arise, deadlines are missed, and budgets are sometimes shockingly high. Most real estate agents have at least a rough idea of what materials will cost, but few know (let alone can accurately estimate) how much labor it will take to install those materials in a given area.
“Real estate developers are familiar with the labor costs in the market where the work will be done,” says Pickert. “The costs in rural areas of some states can be very different than the costs in the suburbs of large or mid-sized cities. This is especially true if you're just starting out in business and don't have staff willing to work for you at the best price.”
In fact, if you don't have a reliable crew, finding one can be a nightmare — they're notoriously hard to find — and the longer it takes to start and finish a project, the more money you'll end up paying in miscellaneous fees that have absolutely nothing to do with the repair or renovation work.
Gold gold gold
Most novice home flippers consider two main numbers when considering whether to take on a project: the purchase price and the selling price of the home, but experienced home flippers are quick to point out that there are a lot more numbers that need to be considered in the risk/reward ratio.
As a property owner, you have to pay purchase costs from the get-go, from title fees and appraisal costs to loan fees and mortgage payments, and even real estate closing costs if you have to pay a real estate agent (though the 5-7% agent fee is typically paid by the seller, which, when you think about it, is you). Closing costs can amount to 2-3% of the purchase price, according to Homes.com. And holding costs like taxes and utilities are often overlooked. The longer you own a home, the more you'll have to pay.
Then there's the issue of capital gains: if you plan to live in the resale property during construction, you won't owe tax on the profit you make after selling the house. But if you don't, you'll pay between 10 and 37 percent of your income in taxes, depending on where you live, how much you earn, and how long you've held the property.
Roll the dice
Knowing all this, if you're looking to hone your house-flipping skills, there are a few things you can do to make the process a little smoother: “Hire a fixer who's well-built but doesn't look great,” says Pickert. “If you can focus on just fixing up the exterior while you learn the business, you'll be much more successful.”
But if you have your heart set on a bigger project, her advice is “Learn as much as you can about the home and the neighborhood before you buy it, and before you start work, have a well-thought-out plan in terms of design, engineering, painting, lighting and finish schedules so that it can be executed in the shortest time possible. Attend inspection days and take notes, paying close attention to everything the inspector finds. Also, plan a site walk-through with an engineer and architect (if extensive work is required) and get as much information as possible from them so you know what you're getting into.”
You also need to think like a detective and be realistic: “Look for the worst situations,” Totaro says. “Identify areas that are expanding rapidly and find ones that are problematic enough to fit your skill set. Don't buy a house with a sinking foundation. Start small.”
And let’s not forget that timing is just as important a factor as anything else. Flipping a home is hard enough in solid times. “There’s always risk in real estate,” says Pickert. If you’re thinking about jumping into this industry, consider getting started next year, preferably before the coronavirus pandemic wreaks havoc on the global system. Sure, interest rates are at all-time lows and borrowing to buy a home has never been more affordable, but with a record 3.3 million Americans filing for unemployment (begging the question: who will buy?), entire industries disappearing, and the world on the brink of a global recession, now might be a good time to stay put.
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