In the last few years, it wasn’t uncommon to hear about an investor making hundreds of thousands of dollars from a one-day property flip.
But the real estate market is changing. Gone, for the most part, are the skyrocketing home values and fierce bidding wars that helped fuel the flipping frenzy of recent years, and some believe that this method of investing — which involves buying properties below market value, making targeted renovations and reselling quickly for a big profit — will soon fizzle out.
Mortgage giant Freddie Mac reported home price appreciation slowing in the fourth quarter of 2005, and the nation’s once-tight housing inventory has ballooned nearly 40 percent since last year, according to the National Association of Realtors, which calculated a 5.5-month supply of U.S homes on the market in March 2006. More ominous signs such as rising foreclosures point to a market that will get worse before it gets better.
Despite all that bad news, three seasoned real estate investors we spoke with said they continue to view property flipping as a viable investment strategy. But they also cautioned that flipping — particularly in a sluggish market — isn’t for everyone and that real estate investors will need to evolve their tactics to fit the changing market.
Fair-weather flippers beware
Seth Weinger, a real estate investor based in Southern California, said he sees signs of a slowing market and believes such a market may force many fair-weather flippers out of the real estate investing business.
“It’s easy to succeed in the market the way it was,” he said. “Many of the investors of the past few years have just said, ‘buy the house at 5 percent under market, fix it up, and let appreciation do the rest.’ Those days are gone. Misinformation or not knowing what to do with information is going to cause a lot of people to lose their shirts in this market.”
Expanded housing inventory in many areas of the country means it may take longer to resell an investment property, and flippers operating on thin margins could be in danger of losing money if they don’t account for the extra cost of carrying the property for an extended period, according to Lance Young, a Virginia investor who’s written a series of real estate investing eBooks.
“If you haven’t budgeted for that extra two or three months of carrying costs, you’re going to get a really rude shock when you look at your bottom line,” he said. “It doesn’t take too many months for you to eat up a lot of profit at three to four thousand a month in interest … And don’t forget property taxes.”
Flipping still profitable
Michelle Mangione of Fallbrook, Calif., started investing in real estate about three years ago, in the midst of the property flipping heyday. She was hooked after her first flip.
“The first one I made $150,000 in one day,” she said. “We bought it and then sold it the next day. They ended up tearing it down and rebuilding.”
Mangione’s strategy involves purchasing pre-foreclosure properties at bargain prices, fixing them up and reselling them for a profit — all within a short timeframe. Although she realizes the market is changing, she believes there are still plenty of flipping opportunities available in her area. She referenced a recent flip in Perris, Calif., that made her $50,000 and a similar deal she’s negotiating now in Apple Valley, Calif.
Weinger agreed that it’s still possible to profitably flip properties in any market, even if it’s a high-priced market like Southern California, where he said he knows of several investors who continue to flip four to five properties a month.
“Flipping is always a viable option, in any market, in any location,” he said. “Knowing how to flip is the art.
“The key to successful flipping is always the same: you make money when you purchase; the sale is a given,” he continued. “Know and control your rehab costs, and plan on selling at 10 percent under the current market. If the market stays the same, you will sell fast, and if the market dips — well, you planned on that.”
Evolving with the market
All three investors are adjusting to the changing real estate market.
Weinger has moved from flipping to more long-term investments in markets that are outside of “high-priced metropolis hubs” because he believes demand for those areas will increase as telecommuting becomes more common and baby boomers look for places to retire. He’s also getting involved in commercial real estate because “the retail market lags behind the new houses.”
Mangione plans to continue flipping properties in Southern California, although she realizes that each flip will take more time and her profits probably won’t be as eye-popping as they were when the market was booming.
“The market has changed where you can’t just expect equity to go up overnight,” she said. “Now you have to add a unit or add square footage or something.”
Young is keeping a close eye on the market conditions to make sure he’s not stuck with a property whose carrying costs wipe out any potential profits.
“This is really a time to exercise a lot of caution in this market,” he said. “It’s a better time for investors to find good deals. But because the housing inventory is starting to swell, as an investor you have to think, ‘if I get something under market, how long is it going to take to sell it?'”
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