Friday, February 2, 2007

Why Some House Flips are Flops

How did it happen? You spent months researching how to invest in real estate. You went to seminars, read books and magazine articles showing the easy way to buy properties to fix up and sell for profit. You may have worked with a great Realtor to find the perfect property or came across a FSBO that was a tremendous deal. After the closing you worked hard to rehab the home to sell quickly: fixed the plumbing, put in new cabinets or carpeting and repainted with neutral colors. Now the home is on the market and it is NOT selling. What went wrong?

Although I am aware that each situation is different, I would like to share a story of first time real estate investors gone wrong. If any part of the story starts to sound familiar, you might want to revise your real estate investment plan.

Two years ago, I was contacted by a couple for a market analysis on a property they were preparing for sale. I met with the owner at the vacant home. She was extremely excited because the home they had bought as an investment was almost ready to list. It had new flooring, paint, carpeting, cabinets and countertops in the kitchen and bath. I casually asked, “what made you take on this endeavor?’ The answer was quick and direct. “We are going to make a ton of money!”

I prepared the market analysis and came up with a market value of $299,000-309,900. About two months later the home was listed for sale by owner for $349,900 or 12-15% higher than I recommended. I decided to keep an eye on this house to see how the first time investor would fare.

The home was re-listed in August with a Realtor. However on closer inspection, the Realtor was the Mrs. Seller who just got her license. Sometime in October they decided to reduce the price to $299,900 but the summer selling season was over. Minnesota had entered a real slowdown in the market and the listing was cancelled in November.

I noticed the home again hit the market last fall. It was listed by a different Realtor but the tax records indicated that the owner was the same. The price was now $269,900 and the home in need of TLC and repairs. This time the home sold in a couple of weeks as it was a great deal.

So what happened? Based on my experience and what was going on in the market, I think these new investors attempted to be landlords when the home didn’t sell for the price they wanted. Renters can be very rough on homes and after rehabbing once, they didn’t have the heart to try again.

In my estimation, this couple may have just broken even but more than likely lost money. They had originally paid $240,000 for the home. They probably had invested a minimum of $7,000 in materials on the repairs that were originally outlined when I viewed the home for the market analysis. The home actually sold for $267,500 with the seller contributing $7,500 for closing costs. Add in a modest 5% commission of $13,000 (though it was more likely 6 or 7%), they may have broke even.

This is not an isolated case. I am tracking another home with another first time investor that I believe is headed down a similar path. It is not as easy to be a real estate investor as the infomercials would have you believe.

There is money to be made investing in real estate especially in the changing market with the high rate of foreclosures. But keep your expectations realistic. Work with (and listen to) an experienced Realtor when selecting a property to invest in. Do a cost analysis including all repair costs and compare to an estimate of what the refurbished home will sell when complete. Keep in mind that the market is always changing and plan accordingly. Have your Realtor do an updated market analysis prior to listing the home. If the market has changed, make certain that you price your home accordingly. Treat your investment like a business and stop dreaming of a “ton of money”. If you don’t adapt to the changing market and you price the home too high, it won’t sell.

Real Estate investing can be very profitable but it is not for everyone. If you are not prepared to work with professionals, listen to their advice, keep abreast of the market and change with the times, it may be best if you invest elsewhere.

Copyright 2007 Teri Eckholm