Is the House Flipping Game Overplayed?

Question

I am concerned that the house flipping market may be saturated.  There’s a business principle that says the longer a product or service is on the market the less profitable it becomes.  Look at the airline industry or fast food or cell phones for example.  It’s when the number of “me too” competitors gets to the point that prices are driven down and profits dry up.  Could it be that we’ve reached that point in the house flipping game?  Was there a time before all the flipping TV shows and books and seminars that people were making a lot of money but not so much anymore?

We have been trying to buy a house to flip for almost a year now to no avail.  At first we tried putting up a website and sticking bandit signs around town trying to lure people into selling their house for cash.  When that didn’t work we scoured the market for houses at below-market value but found none.  We went driving for dollars and wrote letters to vacant property owners which went unanswered.  Finally we settled on buying a house at a foreclosure auction and have been bidding for the past few months now.  What we’ve been seeing with the foreclosure auctions is people bidding prices up to the point where I don’t see how anybody can make a profit.  A couple of quick examples, one house was 3 bedrooms 2 baths 1900 square feet that zillow lists at $192,000 ARV (after renovation value) which sold at auction for $146,000.  Another house with the same stats and a zillow ARV of $212,000 sold at auction for $144,000.  We’ve tracked recent sale prices of flipped homes in the same neighborhoods as the auctions and they’re selling for about 95% of zillow value.  Zillow isn’t perfect but it gets you in the ballpark, especially when indexed to recent flipped home sales.  The point is, in both cases the auction winner has roughly $50,000 to renovate and sell the house which includes renovation costs, realtor fees, insurance, taxes, utilities and other holding costs such as interest on borrowed money.  Oh yeah, and that little thing called profit.  I don’t see how you do that.  I’ve also done some research on the people buying the auction houses and most of them just started flipping in the last year or two.

All of that begs the question, has flipping houses reached its saturation point?  Are people trying it and finding out that it’s not as profitable as it looks on television?  Should we be looking at other ways to invest in real estate, perhaps something more traditional like buying rental properties?  I welcome your thoughts and comments.  Thank you.

Account Closed · Answer

@Mike Ballew Im sorry you are having such a hard time at it .. maybe , just maybe because you are cautious ( which is a good thing unless you are to cautious ) maybe .. deals slip away while you try to decide whether to move forward on them .. in this market , there are deal out there .. you just have to know how to recognize them and act as fast as a mouse ..or a mouse trap .. I lost a bid / offer by the cost of closing just last week on a 3/2 w / a pool 1650 sqft tgat the seller was asking $45k .. I talked to my partner after inspecting the property and told him we should offer full ask .. well we did but he insisted on them paying closing .. well the next person who looked at it offered full ask and they were willing to pay the closing costs of around $1100 .. the property needed $40k worth of rehab and if you figure $10k fir holding and buying and selling costs ( I market the properties myself , although we are willing to pay 3% to a buyers agent ) so, roughly $10k .. that puts us at around $95k and with a Arv of $140-145k that leaves between $45-50k profit that we missed out on .. over closing costs ! .. and the whole rehab shouldnt have taken more than about 5 weeks and maybe 60 dom ( days on market ) .. I would do flips like that everytime I can .. but ..I rely on a financing partner right now that sometimes moves a bit slower than I like or gets stuck on things like closing costs .. I have lost a few deals like that but , I also have done very well on some that we managed to get ..

The one I am currently rehabbing has a projected  profit of $65k which is also 65% roi .. and believe me .. this market is just as flooded as Jacksonville .. It took me almost 5 months to find one that fit our wants and needs .. meanwhile 3-4 slipped by because of being over cautious ..

After time my partner will learn to trust that I know my numbers and the market well enough for him to invest his money without all the extra research needed now ..

Don't get me wrong .. information is good but if it takes three days to make a decision on a property that will sell in the matter of hours .. then thats not great ..

Keep plugging away at it . You will find the right one .. network , network .. and network more .. I get over 50 emails and probably 200 properties sent to me daily plus I look at Zillow, redefine, and mls portal daily .. Also, be sure to look at craigslist ..

I wish you the very best ..

God Speed,

Michael Short

Eugene Kemp · Answer

Mike, I agree with your assessment totally. Warren Buffett always sells when everyone else is buying and vice versa. Jacksonville has attracted too many investors, and deals are very rare these days. Store the cash for the next downturn, or find a better market. They are out there!

Cody L. · Answer

I started by flipping.  Then I moved to "Buy and hold flipping".  Meaning, I'd buy a place, fix it up, rent it, refinance, etc (typical BRRR, sometimes w/o the refi) but I'd also list it for sale.   I could list it a bit above market as I wasn't in a rush to sell it.  If it sells, cool, if nto, whatever -- it's a rental property.

Since I had no time pressure to sell, the properties I did sell were at enough to make it worth giving them (and the rental income) up.

I moved into doing the same thing with apartments.  It was 100% the same deal, just with an extra 0 on each deal.

Jeff B. · Answer

It's not Flipping per se, but market conditions in which it IS applicable vs those where it is not.

Flipping REQUIRES that you purchase at substantial discount from the FMV - - THAT's why you're having problems in some areas.  First recall that to make flipping work, you:

• know the FMV for the area and configuration of the home
• then accurately estimate the rehab expense
• and know the cost of holding it until you get it back on the market
• add in the margin you want as a profit
• and finally (whew), you now have the price at which you can make an offer.

That's a lot to know and to be able to do right so as to allow your markup any chance of becoming true.

IMO, the issue is knowing HOW to do all of this w/o going over budget.

Account Closed · Answer

Jacksonville is attracting bigger investors for the last few years now so a lot of those opportunities grow smaller.

Steve Vaughan · Answer

Not all niches work in every market.  Here flipping and buy and hold purchases are too tight overall.  Too much work and too much risk for too little margin.

We must roll with our markets.  Perhaps new builds are the way to go? Similar business model, but still an operator that has to do something over and over.

Personally, I'm selling some of my least favorite rentals and paying off commercial and higher rate debt.  When the market turns, I want to be ready.  When the music stops, I don't want to be looking for a chair.  Adjust and keep at it @Mike Ballew!

Ryan Terwilliger · Answer

It sounds like most of these opinions are correct, most. The market is up, up, up right now in Houston and there is just too much info for a seller to accept a low ball. Zillow is wrong! Always! Do not ever rely on their numbers. Even rentals are getting tough in this market because no one wants to wait for a  year or two to see a return on their rental. There are some good deals but to think that you will cover your mortgage and still make $500 per month is not normal until you can refi and get that payment down. Again this is the Houston market.

Mike Ballew · Answer

Thank you for your comments they are most appreciated. I liked the reference to the oracle W Buffet

Sid Leibowitz · Answer

Mike. Deals are out there however; there are many more investors migrating here now with lots of cash the ever before. If you follow the Presidents lead, he was in real estate for years in New York, He was associated with many real estate brokers, like Barbara Corcoran et al,who also made it and went on to other endeavors. At some point he realized that he was out gunned  by off shore investors infiltrating New York with even more assets and willing to pay more. He tried expanding out of state looking for better deals and the foreign money expanded out of state as well and they had assets  and guts. There were not to many deals in New York to be had and elsewhere. Whats a man to do? Gravitate to politics where all you need is a gift of gab and the drive of a real estate agent. You do not need to be a lawyer or accountant. You can start small and get a foothold. There are many closed door deals when you are in the inside looking out.

Is the House Flipping Game Overplayed?

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