Top 3 Reasons Flippers Fail

[Patrick Kaiser]

At the end of almost every podcast for many years, they used to ask, "What separates those that succeed from those that fail?" or something along those lines. 

Over the years I've worked with somewhere in the range of around 20 flippers. For context I am a retail real estate agent. Generally speaking the flippers buy properties from wholesalers and I am not involved until sometime after they purchase the property. I only have a limited perspective, but from my point of view, these are the top 3 reasons flippers fail. 

#1) They are too greedy

In flipping you can sometimes make a lot of money. But on average, you might make $20-$30k on an average deal. I know sometimes you make more and inevitably somebody will comment they make $100,000 on every house, but in my experience $25,000 is a good expectation for an average budget flip.

However, most people, usually on their first flip, find this number to be not enough. They don't care about comps, they don't care about market, they just want to make more. So, they insist on listing their houses really high. For a short period there, we could still sell them sometimes but more commonly they would sit on the market for a month or two with the sellers somehow bewildered that the house which was listed 10% above all comps was sitting there while the houses around them were selling. 

After spending an extra $10,000 in holding costs and getting below list price offers, they end up breaking even or losing money on deals they could have made $20-$30k on. Instead of learning their lesson, if they try again, they usually make the same mistake to try and recoop their losses on the next deal. 

#2) They are too hands off

For some reason the flipping scene tends to attract people who just want to pay someone else to flip houses and just collect profit. If you've been in the business for a while and you have a flipping machine going on, fine, no problem. But if you just expect contractors to show up and do their jobs and everyone is just going to treat you fairly and do what they say they are going to do with no supervision you're living in a dream world. Many houses I show up and start taking photos of work done by contractors and send it to the owners including: bad drywall repairs, crooked cabinets, chipped counters, holes left in roofs, lights that don't work, loose toilets, baseboards never painted, drips and runs in paint,  cabinets never sanded (rough to touch look ok in photos) tile floors uneven, the list simply goes on and on. 

Most of the time when this happens I find that the owners have never been to the property and usually are shocked, like they just expected everyone to do their jobs well with no supervision. If you don't care, and some truly don't, fine, that's your business. But more often than not, once showings begin, we get lots of showings and no offers. Because it looks good in photos but awful in person. Again the outcome, sits on market forever, holding costs add up, hopefully they make money but it's far less than I had told them (because I'm using comps that were  decently remodeled and expect the same) and in the end they usually blame me. 

#3) They don't have a plan before they begin

The primary problem here is similar to problem #1 but the reality is not knowing how much the house will sell for when it is finished. It's not a perfect science but 90% of the time you can find comps that have been flipped and if researched properly you should be able to get within 1-3% of the final price (barring poor workmanship mentioned above). But I find a lot of flippers just look at one or two comps, don't do any research on their own, and just assume that if they do more work they can just raise the list price to offset their costs. It doesn't work that way. Market economics, supply and demand, appraisals, are all going to set a general cap on the MAX price a particular home is likely to sell for. If you start with that number, and work backwards, you can practically guarantee that you make money. But most of the new flippers I work with work in the opposite direction. They start with how much they paid, then they add their costs, then they tell me what they want to list at. And, remember #1, where even if they got lucky and could still make $10-$20k on the deal, many of the inexperienced ones squander all their profit on holding costs and lost time on market resulting in lower offers. 

I think it's interesting because when Brandon was asking this question, most of the people are successful and obviously haven't failed (hence why they are being interviewed) and although some have much more experience than me, when I start to see these red flags with new clients of mine, the likelihood of the person succeeding in the long term are very low. There are other reasons related to experience in the trades, knowing what kind of improvements to do or not do, things like that which are more specific to each project/person. But I find these 3 things to be the easiest way to predict if someone will succeed or fail in this business.