Flipping Real Estate Can be Risky Business

by Mike Colpitts

Published on this site: January 25th, 2006 - See more articles from this month

The art of flipping property may seem like the road to quick riches, but it's anything other than that for the majority of investors. Only a small percentage of people who buy real estate to flip actually make a quick profit, according to a new survey.

Flipping property is the business of buying real estate, making repairs to it or playing a rapidly appreciating real estate market to make a quick profit.

Flipping real estate may be part art, part business. But in a survey of 500 of the Nation's wealthiest real estate investors only 10.4% made a profit. The survey was conducted by Real Estate Add, an information driven website.

Nearly half of all investors surveyed ended up holding on to their property for more than a year after the original purchase. Some 52% said they broke even and had to hold on to the property for much longer than they originally intended. The remaining nearly 38% suffered a loss.

Rick and Mary Coughlin of Santa Rosa, California purchased a 3-bedroom, two-bath home, which needed work. The Coughlins went about getting contractors estimates for the repairs before purchasing the home. Estimates ranged from $18,000 to $31,000.

The Coughlins purchased the home, which was built in the mid-1970's, budgeting $40,000 for the work with the idea that they would do a lot of the repairs themselves. However, they encountered problems when they opened up one of the bathroom floors to find dry-rot that far exceeded their expectations.

The couple did most of the work to the home themselves, but still retained a contractor to do some of the repairs, including the bathroom, kitchen floor, kitchen counters and replacing a wall in the livingroom.

"We had made pretty good money flipping property up until that home," said Rick. "But the profits on five other homes were going down the drain on this one. It took us five months and three contractors to get the job done, and then by the time we sold it the place was eating us alive."

The Coughlins had a mortgage with taxes and insurance on the home of nearly $2,900 a month. Mary would paint the inside evenings after work. Rick spent evenings and mornings at the place between work hours. The stress of turning a profit on the home seemed near impossible.

The Coughlins were successful flipping five homes before this one, making nearly $300,000 in profit over three years. But this home turned into a nightmare. One of the bedroom floors caved in when Mary was moving furniture and had to be replaced by a contractor at a cost of $17,423.00, including walls that needed to be replaced as a result of damage to the room.

The bathroom turned into a $21,000.00 project and the Coughlin's luck seemed to have run out. Including contractors fees and building supplies, the Coughlins spent $107,000. Once they sold the house seven months after buying it in a hot California real estate market the Coughlin's were pleased to be free of the mortgage.

After all expenses and payments the Coughlins figure they were lucky, spending $131.000.00. This was their sixth flip so they had experienced success before and they were banking on these funds to help pay off a second mortgage on their primary residence. Instead, the Coughlins suffered a loss of nearly $90,000. The home sold for $624,000.

Nearly a year after the sale on the home, Rick said that was his last flip. "You don't realize how risky it is until you hit the wrong house," he said. "We were lucky to sell that place."

The Coughlins are typical of real estate investors who take the risk to quick riches. Rick and his wife have since bought a rental home they intend to hold on to for at least 10 years to make a long term profit. Overtime pay has helped them to pay-off the second on their principal residence.

Rick's best advice to others considering a flip is to purchase property in an area where the prices are low and hold on to "a lot of the cash."

Mike Colpitts is the Publisher of Real Estate Add.com, an information driven website providing comprehensive updates on real estate markets in all 50 states, where you can also search for your next home. Visit http://www.RealEstateAdd.com