Common Risks Faced by Property “Flippers”
January 3rd, 2010 | 
Author: Common Risks Faced by Property “Flippers”
The first thing that should be noted is that flipping houses is a great way to bring home a rather large profit in a relatively short amount of time when doing so in a seller’s market so to speak. The problem is that we currently seem to be experiencing what is known as a buyer’s market from one end of the United States to another. Foreclosures are at an all time high, which means that the market has suddenly been saturated with properties for sale.
While this is excellent news (believe it or not) when it comes to getting your hands on a property at a lower price, it also makes a difficult time of convincing buyers to pay top dollar when there are better bargains down the road. This of course is one of the primary risks involved in the real estate investment venture that is known as flipping properties. The massive profits that most investors seek cannot be accomplished if the property cannot be purchased, rehabbed, and sold quickly.
Unfortunately, at the moment, very few properties in any city are selling too terribly quickly. The worst case scenario in a situation like this is that you are forced to either absorb the loss (which can in extreme cases result in serious financial hardship or bankruptcy) or rent the property out (which will in most cases negate all the efforts that were made to rehab the property. An inability to sell the property that is being flipped is probably the worst fear of every property investor who engages in this sort of investment. In these cases it is often better to drop the price and take a loss than hold out for a better price risking further losses in the future.
These are not the only risks associated with flipping properties unfortunately. Another risk would be the risk of seriously underestimating the amount of money that will be required in order to do the necessary work. This is something that many first time investors find is a fairly common occurrence. Most people have unrealistic expectations of exactly how far their dollars will go when it comes to investing in the materials and labor needed to properly rehab a property. Even minor cosmetic repairs throughout a house can easily run into several thousands of dollars in order to repair. The flip side is that once these repairs are made the potential profits run into several tens of thousands of dollars.
Another risk that isn’t often considered is the risk of overestimating abilities. This is one risk that costs not only precious time but valuable money as well. Not only is material wasted in the process of discovering you aren’t exactly skilled in any particular tasks but also there are further expenses (often unplanned) involved in hiring the professional to repair the damage and replace the material that was wasted. When in doubt, it is almost always best to hire a professional if at all possible. This also leads to missing deadlines, going seriously off schedule, and adding yet another mortgage payment (if not more than one) to the overall price of the project.
The final risk is often something that simply cannot be seen or anticipated. This was experienced in the days immediately following 9-11 and should not be forgotten. The unforeseen happens every day. Markets crash; local economies can be devastated by the announcement of a major employer that it is going out of business (thinks of the collapse of companies such as Enron and World Comm and what they did to local economies). In these instances, the market will take quite a while to recover from the shock to its system and ‘flippers’ among other investors are often left feeling just as lost and devastated as those that were victimized by these companies-both through no fault of their own.
Stuff happens and those things that we have absolutely no control over are almost always the things that affect us most profoundly. The same holds true when it comes to property investment. The state of the economy, the housing market in an area, and sudden announcements that affect either can often have the most profound impact on those who are investing in property in those areas whether for better or for worse. The trick is in deciding which risks are acceptable.
Posted in Property Fortunes
With this recession, foreclosures and the growing debt of Americans, I think *buying* a house is a risk, let alone buying it, putting time and effort into it, and then trying to sell it. Good luck…
So true. Some people see successes in flipping houses while others end up in more debt than ever. It is a risk as is any big purchase and with this economy, there needs to be much research and speculation before someone takes that jump. I personally probably wouldn’t flip houses if I was already comfortable in my situation simply to gain an advantage or make a profit…
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I think that there must be still money to made in flipping houses. However this may not be the market to try this out for the first time. I’m definitely interested after watching the Montelongo’s do it on tv. -will
Yeah, I have to agree with Dara. It’s rough in these times flipping houses. The other thing is too many people think they can do it with practically no experience whatsoever other than seeing a tv show about it. That’s actually kind of hilarious.
If you want to get into flipping then be prepared to hold onto the property for a while. It also depends on location. Good neighborhoods that are moving houses is great, but the competition to buy foreclosures is very fierce.
This may not be the best market for you to be starting a house flipping business. Properties are sitting on the market for a while in most areas. You’ll need to be very confident in your business model to proceed.
You’re going to have to get paid for your time, they’re going to have to get an attractive return on their investment. It would seem to me that each project would need to have an specially constructed contract.
It can be worth the effort though, especially if you invest abroad
Yes, there are some issues associated with flipping properties. You have described them with enjoyable written style. Thanks for sharing
Fantastic article here. As Dara say’s, the recession has certainly had a bad effect on house flipping, but hopefully things will become more brighter in 2010! Certainly seems like a lucrative business to be in.:D
One problem with flipping is that it doesn’t provide the tax advantages of other real estate investing methods. Homes owned for a short period of time are taxed at regular income tax rates. Flipping is more of a short term, income generation strategy as opposed to real real estate investing that build wealth slowly over time.
thanks for the article, really interesti
House flipping is like anything: risky if done wrong, profitable if done well. It’s really no different than any other investment such as buying stocks or even buying bricks of gold. If you’re smart, have done your research, and buy right, you’ll make money. Jump in without any plan or having done your homework, and a flip can go south quickly and be a huge money pit.