financial reflections

I just saw an episode of Flip This House, (not to be confused with Flip That House) and it really sparked my interest in real estate.  Of course, anything that shows people making a half million dollars in a matter of days sparks my interest.

However, I’m worried that there were problems with the show that made the whole concept of flipping seem too good to be true.  I’m also worried that Flip This House and its similarly named competitor made the whole thing tough to get into.

Don’t get me wrong.  I’m sure there are people out there that make money flipping.  In fact, I know one personally and I think he’s making money on it.  If he isn’t he has a rather time consuming hobby.

But of course, flipping real estate isn’t without its risks.  There are even worries of a tax audit associated with flipping.  There’s also different forms of flipping, some types of flipping are unethical or perhaps even illegal.  That said, I’ll get back to the TV shows on the subject.

Here are the concerns I had with what I saw.  If you missed it, a “flipping” company found a property in Myrtle Beach, SC for $850,000.  Most properties in the area sold for over a million, and the price the got was about 60% of the homes around it.  Then, contractors magically appeared and did everything from painting to landscaping to flooring all in 10 days.  At the end of the 10 days, they held a party/open house where they ended up with earnest money for a 1.5 million dollar purchase on the home.

My questions are:

1. How did they get a property - that appeared livable - for 60% of the market price?  What seller is that desperate?
2. What were the time and money costs for the transactions?  Especially finding the property.  I don’t recall real estate commissions included in the numbers, but I could be wrong.
3. How in the world did they get all those contractors to show up and perform in 10 days?  Contractors are (perhaps unfairly) notorious for showing up late, taking too long and doing shoddy work.  The guys they had busted their backsides.  TV cameras gave the crews incentive to be on their best behavior.  Without them around, I wonder how things would have played out.
4. I don’t recall them showing the financing.  Ordinary folks can’t get financing for nearly a million dollar property plus money for contractors.  Either these guys had cold, hard cash or great financing.
5. They never showed the closing.  They did show the earnest money check (8 grand).  And they did make a comment about it only being good after the closing was done.

All those complaints aside, none of those are the real reasons I probably won’t flip in the near future - never mind the fact that I don’t have any money to start.

The biggest problem I see with flipping real estate isn’t any of the above.  The biggest problem is the flood of shows and interest in the area.  What might have been a profitable niche at one point is now flooded with competition.

Granted, most of the competition - maybe over 90% - will fade away when the fad does.  The real estate bubble, if there is one, will crush a lot of real estate flippers if they aren’t prepared.

But in the mean time, this strikes me as being the opposite of the poker fad.  Smart players just love having new novices in the game.  But in real estate flipping, novice buyers will unwisely out-bid experts.  They will pay 80% for a property that would only have been profitable if one bid 75%.  The novice takes a hit, but so does the expert, who misses out on an opportunity.

Granted, the novices will all lose money in the end, but in the mean time, it will make for tough times for those who want to flip real estate.  Like a poker spectator, I’ll be standing by the rail, watching the game from the side this time.