To the investor, Flipping Houses can be profitable, however,
full disclosures, ensuring quality renovations and abiding by the laws are necessary
prerequisites for long term success.
To the Buyer, proper due diligence is absolutely essential to not
only protect your investment but also to ensure peace of mind and quiet enjoyment of your property.
Buying property as an investment and renovating it for sale to realize a good profit has always been with us. I have seen many investors, architects, realtors and building contractors working together to provide valuable products, services and who have developed great reputations as a result. I have also encouraged people to invest in property, to buy, improve and resell at a profit. There are also many programs on Cable Television such as HGTV’s Flip or Flop, Masters of Flip, The Property Brothers and an old favorite of mine, This Old House that indeed challenge’s us to take up the hammer and build . This can be very positive, rewarding and have acted as a catalyst in many community revitalization projects across the country. There are times, however, when market forces create a perfect storm for flippers to flood the market. Sadly for some, the incentive lies in pure profit and sometimes at any cost.
According to Realtytrac, 179,778 single family homes and
condos were flipped in 2015 accounting for 5.5% of all such homes sold. In that
same time period in Baltimore, Columbia and Towson, MD. Gross Profit on flipping (per unit) was
reported at $91,542 with a gross ROI (return
on investment) of 84.8%, having a median purchase price of $107,958 and which accounted for 6.8% of total
sales.
During the same time period in Washington D.C., Arlington
and Alexandria, Va. Gross Profit on flipping was reported at $96,000 with a gross ROI of 48%, having a median
purchase price of $200,000 and which accounted
for 5.5% of total sales. With the type of returns posted for flipping
properties it is not difficult to see why so many flippers flooded the market.
Regarding flippers, I have come across four basic types as follows. Local operators trying
to make quick profits via renovations, Out Of Town flippers converging on a
region to extract quick profits, large companies operating in multiple regions sometimes the
entire eastern seaboard and other operators
buying , holding for a short period and selling during times of rapid
appreciation, sometimes without doing anything to the property. Smaller out of town flippers enter an area,
buy depressed property, hire a contractor and renovate the property. This may also
be without a permit if they can get away with it. After the sale of the building many of these
operators disappear. The larger more corporate types buy distressed properties
and may or may not monitor closely the renovation process. This can cause compromises in the
construction especially if less than reputable contractors are used to execute
the work. I also want to state that
there is nothing wrong with flipping properties per se, as long as there are
proper disclosures, ethical practices, a regard for neighborhood and a system
of accountability. I also want to state that there are times when bad
contractors hurt flippers that want to do the right thing. Irrespective, buyers
need to have the assurance that they are not buying a lemon and that their
health, safety and welfare remains paramount throughout the transaction.
There are also times when a home owner decides to improve
the property themselves in the hope of increasing property value only to end up
with shoddy work by a less than reputable contractor. I always recommend to home owners in these
cases that they a) Document their
communications with the contractor, b) Institute regular weekly meetings to
discuss the work and c) To have a
contract designed whereby the contractor can be fired if the work is being
compromised. I also recommend to everyone doing renovation work to ensure they
secure all the required building permits and to ensure that they are not
renovating or buying a property where there is work beyond that which is approved by the permit.
For those buying a flipped property, remember that they are designed and staged to look great. Good
paint with flashy accent colors, fancy kitchen equipment, granite counter top, nice
flooring etc. They have all the buzz
that people are looking for. The “New Look”, “Curb Appeal”, A La Mode Finishes
such that a buyer may even be tempted not to get a Home Inspection. As a buyer
of a flipped property you will always want to do proper due diligence and to thoroughly
inspect the property. Shoddy workmanship is a sure tip-off that there may be
problems lurking. Get copies of all issued
permits. Ensure that all additions are covered in the permit as there are many
reports of additions that had to be demolished as they contravened the zoning
regulations. Get a Home Inspection done
and if there are any references to structural issues, get an engineer to check
it and issue a corresponding report. Watch
for signs of mold and water penetration and remember to turn on all pipes and
let run for a few minutes to ensure there are no blocked drains etc. Also try
to secure warranties where possible and ensure that a Certificate Of Occupancy
was issued for the building. This is
usually issued by the governing jurisdiction after all permit inspections have
been signed-off.
In closing, I hope that this will be helpful to my clients that
have engaged me on the subject as well as to the general public. I believe in most
cases the motives are honorable, that is, wanting to do the right thing and
being financially rewarded for the effort. As in everything, we need to be vigilant.
For those of you wanting to hire a contractors
or a handyman, the FHA recently issued a
“Guide To Hiring Good Contractors And Handymen”
that can be found at the following link: http://fha203kstreamline.org/blog/
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