House Flipping Stops Working

It was bound to happen. An article today at Money.CNN.com highlights the woes of a couple who have made a lot of money on house flipping, and are now stuck with a house that won't move.

At MortgageGuide101.com, I've been following house-flipping for some time. In fact, my most recent house-flipping entry was on 10 mistakes to avoid. I've generally been against house-flipping as your sole source of income, because I knew a coming downturn in the market would make it unprofitable unless you could buy and hold.


Dave and Sharon Corey are a classic case.

Dave Corey has been following what seemed like a good strategy for the last few years: buy cheap; rehabilitate; sell higher. Get a run-down property that has a good roof and is structurally sound, and spruce it up. Do the work yourself as much as possible to save on costs. Then sell the property for a tidy profit. However, Dave's latest purchase in Ocala, Florida has been in his hands for 10 months. So far, he's out of pocket at least $160,000 and he hasn't been able to sell at a price of $178,900.


Corey's solution is one that other house-flippers may have to consider: a deal with a young couple that has them leasing the property with an option to buy. The couple is paying $1200 a month, and $200 of that is going to the down payment.

In the meantime, while his money is tied up, Dave's looking forward to when he can get back into the flipping business. He's hoping his wife will be willing to do it actively with him, as opposed to just sharing in the financial aspect. (I hate to tell him this, but it might be awhile yet. I don't think this market is going to turn on a dime.)

The bigger problem with many house-flippers is that they are in exotic mortgages. These are the interest only or even capitalized interest schemes that can really create a financial mess. If you are in any kind of exotic mortgage, get out! Lock in an interest rate on a good first mortgage with a reputable and financially stable company, and get your costs under control. If you are shopping for a new, fixed rate mortgage, doing your legwork on the internet can save you some time and effort. I invite you to check out some of the sponsors for this site in your search for the right mortgage.

Michael Chantrel

6 comments
Posted by Michael on May 15,2007 at 7:56 AM

I do think flipping houses is a gamble. It can work if: 1) you've evaluated the house well, 2) you are a contractor or tradesperson and general handy person who can do a majority of the work yourself, 3) you can keep your out of pocket expenses to a minimum, 4) you know the housing market in your area and the prices are at least stable, if not rising, and 5) you got the property at a below-market price.

"Fippernation" is a great and funny online series about the perils of house-flipping. It's also got a lot of truth in it. It shows how hard it is to make money at this!

Posted by Brad on May 15,2007 at 3:34 AM

We actually ran into that same problem some time back. Luckily things turned and worked out well for us. Its a risky bus.

Brad,

Real Estate

http://www.effectlocal.com

Posted by Home Mortgages UK on March 24,2007 at 3:53 PM
I have a friend that is trying to flip one right now and it is coming down to the wire.  He didn't want to have to take out a mortgage on it but it looks like he'll have to because the market is slowing down...much harder to sell fast.

Posted by Michael on March 17,2007 at 9:04 PM
House flipping may work in any market for someone who can: 1) find a value home which needs minimal / reasonably priced renovations; 2) do those renovations themselves and/or know good / reasonably priced contractors; 3) has enough money to be able to hold a home if there is a challenge in selling; and, 4) won't sink his or her financial boat with one flip that doesn't work. This does NOT describe the large group of people who want to do house flipping to make big bucks or who are being conned into thinking that it will make money for them "easy".
Posted by Michael on March 2,2007 at 6:51 AM
The problem with interest only loans is exactly the problem that the guy in the story has -- he can't move the property! He's not necessarily going to get out of it what he put into it. Therefore, he could sell the property and actually still owe money on the home, especially if 100% of the place is financed. It's a risk to be in an interest only loan; you have to know what the risks are and make your moves accordingly. Most people who are in interest only "exotic" loans are not really able to handle the risks they are taking on.
Posted by Joe on March 1,2007 at 11:15 PM
What is wrong with interest only loans?  If this guy is flipping properties, how much principal can he pay when he is owning the property for the sole purpose of fixing it up and selling in in a few months?  Even a Negative-amort loan (pay option arm) would not hurt if you are improving the properties value with upgrades and repairs.  No prepay is the more driving factor for this client.
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