Before and after photos of a Utah Valley home.
Everyone knows Salt Lake City's housing market is hotter than a $2 pistol. Home prices have risen 24.7% over the past year, and the median home price hovers around $485,000. Still, buyers are lining up to buy while interest rates are low, and many are happy to do so, even if it means paying a premium for a home. In fact, more than 55% of homes are selling for above list price.
Inventory is low, and most homes sell within 13 days of listing: According to Redfin, 369 homes sold this August, down from 400 last year. With so many homes selling, it's only natural that things will go wrong, and not every home will be worth top dollar.
Homes get foreclosed by banks or short-sold. And some are in such bad condition that the average home buyer won't take them on as a project, even if the price is right. These “distressed properties” become targets for real estate investors (known in the industry as flippers), who buy them cheap, fix them up, and resell them at a profit. But what does it take to be a house flipper, and is it as easy as it sounds?
Even people with no real estate experience at all can easily make money flipping a basic property like a low-cost apartment by giving it a thorough cleaning and giving it a bit of a makeover, but it usually involves a lot more than that. Some flippers do most of the work themselves, while others hire contractors to do almost all of the work.
Doug Larson makes a living flipping homes and offers insight into the pros and cons of this lesser known side of the real estate market. Larson started out flipping luxury properties because the profit margins were bigger. “But after the 2008 financial crisis, I switched to regular smaller homes on the west and south ends of Salt Lake. It was safer to get a few base hits than to try to hit a home run,” he says.
A typical resale home today is in Karns, Sandy or Provo. “It's neglected, the yard is overgrown with weeds,” Larson says. “It has three bedrooms, two bathrooms and needs $15,000 to $30,000 in work to make it a nice home. It usually needs cosmetic improvements like carpeting, painting and a little landscaping, and often also needs a new HVAC system, water heater, roof repairs and upgrades to the kitchen and bathrooms.”
Larson flips up to six homes a year, doing much of the work himself. The purchase and sale process takes three to four months, but the actual renovation work takes an average of six to eight weeks. Larson says the steady income from rentals helps him balance his basic finances, and the income from reselling is like a bonus.
In 2020, Larson sold five homes and bought two to rent. Competition is fierce and prices are soaring. “I made offers on about 20 homes, but bidding wars drove prices up to uncomfortable levels,” Larson says. “The cost of building materials and hiring contractors has also risen. Profit margins just aren't there. The pandemic is a factor. Also, ultra-low interest rates have reduced monthly payments and increased list prices people are willing to pay.”
Since the 2008 financial crisis, Larson has ensured that nearly every home he buys is a cash-flowing rental property. “I always have two or three exit strategies prepared so I'm not cornered on one outcome. From 2010 to 2015, we bought a lot of foreclosures and short sales properties. As market prices have risen, there are fewer of those. Most of the distressed properties we buy now are abused and abandoned rentals where the landlord has grown tired of the property and is looking to foreclose on the asset and move on to the next property.”
Larson lost money during the 2008-2009 financial crisis, and while he never missed a loan payment, he lost money on some deals. Since then, he says, he's had some projects with very low profit margins. “I probably would have made more money working at McDonald's.” But in most cases, his margins are around 10 to 15 percent of retail price, so on $350,000 in sales, he makes around $35,000 in profit.
According to Larson, there's a common belief in real estate that the easiest way to make $1 million is to borrow $1 million and get other people to pay you back. While that's easier said than done, it's still a great way to build up savings and have a little freedom.
From Larson's experience, real estate investing requires three things: time, money and skill. “Skills can be learned or paid to be acquired. You can borrow money. You can use other people's time. With a little creativity and the ability to leverage your own and other people's resources, real estate investing can produce some truly amazing results. Real estate investing isn't for everyone, but it can be a great way to live.”