A “We Buy Houses for Cash” sign on a property in the Grove Park neighborhood of Atlanta, Georgia, USA. [+] Saturday, May 22, 2021. U.S. states and cities are cracking down on wholesaling, a niche area of home flipping run by a plethora of mostly unlicensed agents lured by YouTube tutorials and a cutthroat market. Photographer: Matt Odom/Bloomberg
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John Burns Real Estate Consulting (JBREC), a major player in the commercial sector of the housing industry, recently noted that rising borrowing costs have forced many “fixer-and-flip” businesses out of the market, inspired by reality TV shows in which people buy homes, renovate them and then sell them for a profit.
The country has been through these times, and it's risky to jump into this field without significant expertise in construction, investment, and real estate. (Even a company like Zillow tried to get into this field and failed badly.) You also need a lot of knowledge in marketing and finance. In the 1980s, there were people who were sure they could make a lot of money, and they made a lot of money when the economic situation took a nosedive.
As JBREC noted, rising interest rates mean additional expenses that many smaller real estate agents hadn't anticipated. “Rising interest rates have created a much higher risk environment. Acquisitions have essentially ground to a halt because sellers have not reset their expectations since the beginning of the year,” said one Atlanta-based real estate agent.
But it's not just a matter of bad timing: Flip a house is a lot harder than you think. When home flipping was all the rage in 2016, an analysis provided by real estate information company RealtyTrac for an article I wrote for Money magazine found that 12% of resold homes sold at break even or at a loss, and 28% made less than 20% of the purchase price, enough to cover renovations, financing, and other expenses.
Back then, flippers would tell you that the margin you needed to start a project was about 30%. That meant that when you sold, you would get, on average, 30% more than the price of the home, renovation costs, and commercial loan fees (because it wasn't a traditional mortgage), which could be as much as 12% to 14% in interest alone. And national interest rates were already above that level.
Managing a single project can take anywhere from 5-10 hours a week. This means you're not doing the work yourself, you're paying someone to do it for you. If you're thinking, “That doesn't seem that hard,” splash some cold water on your face and take another look. Contractors aren't just slaving away to steal your time and charge you more. Most contractors are trying to get this done so they can move on to the next one.
But this type of work is much harder and more time-consuming than you might think. Try doing something really simple at home, like replacing the gasket on your sink. You get the special tools, learn how to do it, and find where the valve is, but it takes even more time to take it apart, check for problems, fix them, and put it back together with the new parts you need. And that's the easiest part; we haven't even begun to learn about building codes, permits, and other things that have to be done.
So, do you need to hire contractors? Here are some facts from those in the commercial real estate industry, including residential construction, about the difficulties they're facing in securing construction workers. According to government statistics, year-over-year prices for construction materials have improved somewhat as lumber prices have fallen to their 2018 highs, but they're still growing at about 14% annually. Supply chain issues persist for many of the parts you need.
One former builder told Apartment Therapy last year that he gave up on flipping homes because he didn't know anything about the real estate industry or the market. For example, he did a project in an area that was considered less popular, and although the job went well, it took a long time to sell. Whether it's because of location or what buyers are looking for at the time, when you can't reasonably predict whether what you're offering will attract the financing you need, you're relying on luck. This is an avoidable way to run a business, but this one has to.
Finally, you need funds to sustain yourself and your team while maintaining the additional mortgage, insurance and property taxes on the home you plan to resell.
There are very few easy paths to wealth or extra money, it takes effort and usually capital on top of that.
