There has been a lot of discussion in the real estate investment world over the past 18 months that the ‘flippers’ and ’speculators’ are going to lose big as the market softens and the ‘bubble’ bursts. I can’t say that these ‘experts’ are wrong, but I also don’t think it’s gospel.
For those of you that aren’t quite sure of what I’m referring to, a ‘flipper’ is someone who buys a property and turns around and sells it within a few weeks or months for a profit. Usually they have to repair or improve it, but the truly great simply clean it and because they negotiated such a great price on it, can sell it for a worthwhile profit.
As the market softens, meaning that homes don’t sell for full value in two weeks anymore, I agree that there are going to be a lot of ‘flippers’ losing their shirts, but it is all due to bad fundamentals, not the market. I think there will be plenty of successful investors flipping properties in this market and well into the future and will make great money doing it. The key is not the market, it’s the fundamentals.
Over the past four years many people have become so-called ‘investors’ by getting a property, sitting on it for 6-12 months and selling it for a profit. They could even pay more than than it was worth, let the market catch up, pass them and then sell for a profit, all while renting it at a loss every month. This is an example of BAD fundamentals!
The key to success in flipping is knowing how much you’re going to make on the property when you buy it, not when you get ready to sell it. It takes more work to figure this out because you have to do some research, which the so-called ‘investors’ haven’t been big on over the recent past.
The whole reason I’m on this subject right now is that I looked at a deal yesterday that the seller, who is supposedly a ’serious investor’, tried to dump that wasn’t fitting his investment profile. Supposedly he thought it was worth $280k when the rehab was to completed, but had about $10k left of work to get to that point. After my research on the area I did an analysis, which had a profit of $30k built into it and all the associated costs to rehab and flip it, I would have to buy it from him for $33k less than he needed to sell it for. The sad thing is that he will sell it to someone who thinks they can make money on it and will end up breaking even after 3-6 months of work and all the cash out of pocket to do it.
I’ll share my views on ’speculators’ next.
