Flipping Houses for Fun & Profit

The idea of flipping a house can be very appealing. Who wouldn’t want to buy a piece of real estate and then flip it for a profit next month? With a redl hot real estate market like we have in Vancouver, making money on a flip seems pretty easy. But what really happens in real life?

Over at The Leaning Channel and Life Network, you’ll find quite a few shows on house flipping. All the shows profile someone who bought a run down piece of junk house. The goal is to invest some money renovating it and then to sell it for a profit. Of all the house flipping shows, the best is Property Ladder, starting Kirsten Kemp, who has 10+ years of flipping experience. Why is Property Ladder better than the other shows? Because is gives the entire picture.

The other shows, like Flip That House, shows the cost of the house, the cost of renovations, and an appraised selling price set by a realtor on what he/she thinks the new house can sell for. The problem with this kind of scenario is it will always show a profit because the realtor will always appraise a property high to try and get the listing. What the realtor says it will sell for and what it will really sell for are two different things. Unlike the other shows, Property Ladder sticks with the story until the house is sold to find the true profit or lost made.

If you only watch Flip That House, you would think that everyone is getting rich doing this. However if you watch Property Ladder, you’ll begin to understand just how difficult it is to make a profit flipping a house. The last show I saw feature two couples who got together to buy a $1.16 million house Santa Barbra, California. The goal was to spend $75,000 in renovations and then sell the new house for $1.4 million, making a profit of $165,000 ($82,500 per couple). And they plan to do all this in six weeks.

Like most things in life, what one wants isn’t always what one gets. The six week renovation took over 4 months because of problems that kept popping up (like one of the couples going on a vacation in the middle of the build). When the renovations were done, the host of the show gets three realtors to appraise the house and recommend a listing price. The appraisals came in at $1.299 million, $1.35 million and $1.4 million. The flippers decide to list the house for $1,399,000. To my shock, they actually sold the house for full asking price in 7 days! So the numbers look like this. Paid $1.16 million, add $75,000 for renovations, sell for $1.399 million for a profit for $164,000, which is still not bad for four months work!

If this was Flip That House, $164,000 would be the profit figure they will show. However, Property Ladder gives you the full picture. Because the renovations took 4 months to complete, the flippers had to make 4 months worth of mortgage payments – that came to $30,000. They were lucky they sold the house in 7 days because another $7,500 monthly payment was coming up. After accounting for the mortgage payments, the profit came down to $134,000. Still not bad, right? Well, there is this little thing call a realtor’s commission that has to be paid when a house is sold. The commission on a $1.399 million sale is $97,000. That leaves a final profit of $37,000 for the two couples to divide among each other. So each couple got $18,500 for 4 months of hard work and a ton of stress, and the realtor made $97,000 in 7 days.

In an interview with one of the couple after the flip, he said that if he had to do it again, he would have gone in alone instead of taking another couple in as partners. And for his next flip, he plans to have a realtor license!

10 thoughts on “Flipping Houses for Fun & Profit”

  1. Marco says:

    Thanks for another great article John!

    Sounds like a good opportunity: we should all just dump this web content business and just go flip houses!

    Have you heard of wrapping a house? Maybe if you really want to make a load of money, perhaps you can flip the house then wrap it up for someone.

  2. John Chow says:

    Wrapping a house is new to me. What is it? The only wrap I know when it comes to real estate is the wrap around mortgage.

  3. Justin says:

    I love Flip this house show (A&E), I hope to do this one day. Big risks can pay off!

  4. Rob says:

    Wrapping a house is basically taking out a loan to buy the house and then locking a tenant into a lease/buy agreement at a slightly higher interest rate than you are paying. It means you can be cash positive from day one.

    It seems to attract a lot of sharks though so be careful.

  5. John Chow says:

    Wrapping a house would be impossible to do here. Housing prices are simply too high. You’ll never get a tenant to pay enough rent to cover the mortgage payments, unless you have a huge down payment.

  6. Rob says:

    A lot of people aim the wrap at others who have difficulty getting finance, but aren’t necessarily short of cashflow. Bankrupt entrepreneurs etc. The lease/buy contract is heavily in favour of the wrapper in terms of defaults etc.

  7. John Chow says:

    Ahh I see! The old “Be the bank” type of strategy. Another example of this can be done if you buy a property for less than market value. Say you got a $100,000 place for $75,000. You can get a $75,000 mortgage on the house and buy it with nothing down. Then you flip it quick for $100,000 by offering nothing down. The buyer would assume the $75,000 mortgage and take a 2nd mortgage from you for your $25,000 equity. Now he is paying off the 1st mortgage and you’re getting 2nd mortgage cash flow every month.

  8. Rob says:

    I see – that’s kinda a cash flow variation of the flip.

    Another cash flow strategy I have seen is to buy the house, then sell the option to buy it at a predefined price at a future date taking into account interim “payments/rent”. It’s basically futures trading for rental property.

  9. Marco says:

    Nice to see people know how to wrap a house…

    A lot of people aim the wrap at others who have difficulty getting finance, but aren’t necessarily short of cashflow.

    Yep, they’re your main customers.

    If you do decide to wrap a house you are providing a (valuable) service to these types of people.

    But before you do get yourself locked into one of these contracts… (as the landlord) you have to question – how did these people get into such a bad financial situation in the first place? And do they deserve the second chance?

    And in return for taking such risks, you the investor should be paid (handsomely).

  10. Jim C says:

    I always wondered why shows like “Flip This House” did not show you what the real estate commission was. I guess I still wonder about that! But it is interesting to see that they don’t. I suppose if folks saw how little money the flippers were making it would not make for good ratings.

    Investing $1.2 million to make $40,000 is just plain stupid. You could invest that money at 4% for 6 months, save yourself 100% of the work and 100% of the risk, and make $27,000.

    There is still money to be made in flipping real estate, but it takes a realistic approach and some common sense!

Comments are closed.