I believe in 1970’s parenting. This means if my kids aren’t at the playground then they’re in front of the TV. (Don’t judge.) We’re big Peppa Pig fans in this house but man, do not put on that whiny Caillou in my presence or I will stab myself in the eye. Unfortunately, the fact that I’m well-versed in all things kid-show means I rarely get to watch the TV myself. And I mean, rarely.
A few weeks back though, the stars aligned with nap time, not having to show houses, and not feeling compelled or particularly motivated to clean the house. I actually got to watch HGTV while it was running a “Flip or Flop” marathon. After a few hours of watching with my jaw dropped, I said to the man, “Ohhhh. I get it now.”
It now makes perfect sense why so many people think that flipping houses is a quick way to make some cash. They saw it on TV so it must be true.
Let it first be said that unless you have a real “in” on something, a unique idea or a huge advantage, there is no express lane to wealth for the vast majority of us. Did you create that Pokemon game everyone is going nuts over? Yeah, me either. Back to work for us.
So, where does this show and others like it steer people wrong? Let’s drill it down.
- They completely ignore legitimate acquisition costs. In one episode, a house was being auctioned for $350,000. The flippers called the listing agent the day it was listed and offered $275,000 cash, sight unseen and the offer was accepted. An offer 21% below asking price wouldn’t even be responded to in the DC market, much less most other markets right now in the U.S. - unless there were extenuating circumstances of which they didn’t make the viewer aware. And the first day on the market? Laughable. It takes months to get a 21% price reduction from the list price – even if the list price was grossly over what it should have been.
- Their renovation costs seem quite low. Contractor quotes for totally gutting houses on the show come in around the $50,000 to $60,000 range. In real life, I estimate the true price is more like $100,000 to $125,000. In DC, if renovation costs for an entire house flip are less than six figures, they are either cutting serious corners or they could be cutting the contractor in on the profits.
- When they have construction overruns, it’s portrayed to be this huge bank-breaking deal but then it’s only a few thousand dollars. In the grand scheme of things it hardly cuts into their profits. Ask anyone who has ever tackled a home renovation project – no matter how big or small, it always takes twice as long, costs twice as much and sucks 8 times as much as you thought it would. If these people are really squeaking out a profit and a couple thousand dollars causes such drama, then something is amiss with their numbers. The drama is really just for show. No one renovates a house without expecting a swing in their budget and allowing for an overrun.
- The homes they acquire for around $300,000 end up selling in the mid to high $400,000’s. They show profits anywhere from $60,000 to $100,000 for a few weeks work. This is insane. No one is making money like this unless they really know what they’re doing. It takes time to add value like this to a home. The reality is, if there was the underlying value in a house so much so that it could be acquired for $300,000 and sold for $450,000 then everyone would be doing it, right?
Interest rates are low and prices are as high as they have ever been. When the market is as good as it is right now for buying real estate, it is impossible to find something at a low enough price to be able to renovate, add value, sell and have a nice profit. It isn’t impossible, but the people who do this are actually on the hunt for these houses full time. They build relationships with property owners – sometimes over years, trying to work a deal to buy their home. They endure Property Tax Sales, probably one of the best scams going for the would-be 51st state. They understand the acquisition is key – both price and ease of financing, which means they have cash or investors who can back the buyer and make them basically as good as cash.
If you are looking for a “good deal” or a “fixer upper to flip” or a “place to buy and rent out to make money every month while someone else pays the mortgage,” step away from the TV. In this market, those expectations are out of line with reality. What’s portrayed on TV is wildly inaccurate, and is really crafted for entertainment value first and foremost. There isn’t any legitimate merit in their acquisition, negotiation and construction processes. It’s all just for fun. Or for making fun. Because does anyone really scout vacant houses and go to auctions in stilettos and a camisole? Oh HGTV, never ever change.