Flip or Flop: Which would you do?

When we were on Thanksgiving Break just a couple of weeks ago, I was hanging out with my family– lounging, if you will– enjoying the Home Life, and doing very little that might be considered either interesting or exciting.  In the last couple years, my sister introduced my family to the television channel HGTV.  So you know what I spent a lot of time doing?  Watching HGTV.  Property Brothers, House Hunters International, Love It or List It, etc.  The two shows I watched most were Flea Market Flip and Flip or Flop.  It may seem superficial, but I love watching the transformations that take place and seeing what objects and houses look like when they are (hopefully) changed for the better.  The main difference between the last two shows is that Flea Market Flip pertains to competitors flipping pieces they buy at a flea market, whereas Flip or Flop is about a married couple that flips real estate.  But some of you might be a little bit confused, and wondering: what does it mean to “flip” something, anyway?

source: https://www.facebook.com/FlipOrFlop.HGTV?ref=stream

To flip means to purchase a “revenue generating asset” and then, relatively quickly, resell it for a profit.  On television shows such as Flip or Flop, flipping houses is often portrayed as involving quite a bit of renovation and rehabilitation, in which the people who buy said houses greatly increase the value of trashy fixer-uppers, enough to sell at a price that will more than cover the costs of the original purchase and renovation (supplies, labor, etc.).  But this is not all there is to flipping.  Flipping can also mean that a company, a bank, a team, or an individual buys houses and sells them at a profit with little to no renovations whatsoever.  An example of this would be if property value is increasing in an area/neighborhood and someone buys a house, waits until its value naturally increases, and then sells it.  Kind of sounds sneaky, huh?

Is it a good idea to get into this market right now?

Flipping houses is risky business, which television shows don’t always express.  If you have never seen such television shows or heard about this line of business, imagine forking over $30,000 for a house you want to flip and completely misjudging what it will cost to do so.  Then imagine selling it at a price that does not cover your expenses, putting you in the red.  I don’t know about anyone else reading this who has watched shows about flipping properties, but I have always, personally, felt anxiety from thinking about the risk involved.

http://www.bloomberg.com/money-gallery/2011-09-14/finding-upside-in-real-estate-s-downturn-1-.html

Around 2005 the flipping business was at its peak, and “amateur investors” were actively buying real estate with the intent to flip.  Since the recession hit between 2007 and 2008, banks have been major players in the flipping business.  That was a time which created a lot of foreclosed homes, so that by 2008 a majority of flippers were banks.  Consider this a contrast between large companies with a lot of experience and those “amateur investors.”  The role of banks has decreased since then, with bank-owned flips comprising 72.2 percent of the market in 2008 and only 35.2 percent of the market in 2013.  While the article containing this information did mention a 15 percent increase in bank-owned real estate in the first half of 2014, this is a sign to me that more individuals and small companies have gotten involved in flipping houses in the last few years, and that it might be a reasonable business to get into.

In 2013 about 67,000 houses were flipped in the U.S., which is less than in the years 2010 through 2012.  However, there was a high success rate of 77 percent, which sharply contrasts with the 24 percent success rate in 2008.  Success in this case is a measure of how many of the houses bought and flipped were sold for a gain within 12 months.  Houses in 2013 were flipped for more money than in recent years, at an average of $90,200 per home, as compared with the range of averages between approximately $50,300-$82,800 from 2001-2012.

[Short teaser trailer for season 2 of Flip or Flop.  In the first 10 seconds, they mention the market crash, and in the last 10 seconds they refer to the houses they flip as “distressed properties.”]

In the market for homes today, there is relatively low inventory and high demand.  All of this translates to me that those who work in real estate, and do it wisely, are probably making a pretty penny.  But you may be wondering…

How can you tell when the market is good?

This link will take you to an area of the site RealtyTrac where you can watch a series of videos that will teach you the 7 Secrets of Buying Foreclosures (well, upon registering for a free trial membership).  Foreclosed homes are an example of “distressed inventory.”  As told by the site 24/7 Wall St., vice president at RealtyTrac Daren Blomquist has said that a good market for house flipping “depends on the availability of distressed inventory [such as foreclosed homes], generally rising housing prices, and a growing economy.”  In these conditions, flippers can buy “distressed” homes at a low price, and sell them for more than they purchased them.

Where is a good place to flip houses?

So maybe the question of whether or not now is a good time to enter the market of flipping houses is best answered when looking at specific locations.  24/7 Wall St. came up with a list of the 10 best counties in the U.S. in which to flip houses.  It is summarized below:

10. Montgomery County, Maryland

• Return on investment: 38.9%
• Increase in foreclosures: 8.6%
• Unemployment rate: 4.5%
• Number of flips: 179

9. Bergen County, New Jersey

• Return on investment: 40.8%
• Increase in foreclosures: 43.2%
• Unemployment rate: 6.3%
• Number of flips: 114

8. Wright County, Minnesota

• Return on investment: 45.2%
• Increase in foreclosures: 14.2%
• Unemployment rate: 6.4%
• Number of flips: 295

7. Anne Arundel County, Maryland

• Return on investment: 47.6%
• Increase in foreclosures: 16.2%
• Unemployment rate: 5.3%
• Number of flips: 146

6. Saint Mary’s County, Maryland

• Return on investment: 48.7%
• Increase in foreclosures: 40.0%
• Unemployment rate: 5.2%
• Number of flips: 321

5. New Castle County, Maryland

• Return on investment: 52.8%
• Increase in foreclosures: 28.6%
• Unemployment rate: 5.9%
• Number of flips: 117

4. Campbell County, Kentucky

• Return on investment: 69.9%
• Increase in foreclosures: 238.5%
• Unemployment rate: 6.3%
• Number of flips: 163

3. Baltimore County, Maryland

• Return on investment: 70.8%
• Increase in foreclosures: 32.3%
• Unemployment rate: 6.1%
• Number of flips: 546

2. York County, Pennsylvania

• Return on investment: 72.5%
• Increase in foreclosures: 10.2%
• Unemployment rate: 5.9%
• Number of flips: 179

1. Prince George’s County, Maryland

• Return on investment: 83.4%
• Increase in foreclosures: 136.8%
• Unemployment rate: 6.0%
• Number of flips: 347

In this list, a higher increase in foreclosures and relatively low employment are considered positive factors which make that county a more successful area in which to flip properties.

source: http://www.truthermemes.com/good-luck-selling-it/

I must admit that it doesn’t feel very morally clean to me that, if someone flips houses, their success partially rides on buying a house that has been foreclosed and taken from someone else, or simply buying a house from someone at a cheap price and then turning around and getting someone to buy it from them at a higher price.  This is yet another reason why I am not sure I would want to go into flipping houses.  While we do not necessarily know the reasons for foreclosure on the properties that get flipped, it still weighs on me that a flipper’s success comes largely from foreclosures, which are likely a result of a person’s/family’s difficult financial situation.  The fact that an increase in foreclosures is a factor that points toward a good market for flipping is quite unfortunate.  But these are concerns I have when it comes to profitable markets in general.

I think that just trying to look at television shows such as Flip or Flop from an economical perspective, with the knowledge I currently have, changes the way I think about the show and the business of flipping houses.  This is all an extremely small taste of the economics of real estate, and perhaps, one day, I can obtain more knowledge on the subject and watch HGTV from a completely different perspective.