Reader Question: “Do You Recommend Doing Flips?”

I recently received the following question from a reader:

Do you recommend doing flips in the Seattle metropolitan area?

I did a flip in the San Francisco Bay Area (where I’m from) and made $59K profit.

I’m thinking Seattle may also be a good market as well given Boeing and Microsoft as main employers attracting new people to the area.

What are your thoughts?

Is it a good idea to “flip” homes in the Seattle area? It depends…

First it depends on your definition of a “flip.” During the housing bubble people were buying homes with little to no money down, doing nothing but holding onto them for a few months, and selling them for tens of thousands of dollars in profit to the next sucker to come along. I believe (and hope) that this variety of flipping is dead. Don’t even think about it—you will lose money.

In a more traditional sense a “flip” is when you buy a home, fix it up, add some real value, and sell for some amount more than what you put into it. Even that version of flipping was a bust as the housing market peaked, but lately it seems to have been making a comeback.

I first noted the return of the fix-n-flip in the Seattle area in December 2010. Since then I have seen more and more of these kinds of flips, even including a pair of homes on my own street that were both successfully flipped earlier this year.

So would I “recommend” doing a fix-n-flip? It depends… If you’ve got the cash to buy a cheap, run-down home in a nice neighborhood, fix it up well, and properly market it, you can definitely make some money in today’s market.

However, don’t think it’s going to be easy money. Finding the right home (or homes) will be hard work. Fixing them up will be hard work. Dealing with listing agents and buyer’s agents to sell the home will be hard work. And if you don’t know the neighborhood where you’re trying to flip a home, you run the risk of creating a home that is too nice for the neighborhood, which will make selling your work for a decent profit difficult.

In short, flipping is possible and certainly more likely to be successful than it was between 2007 and 2010, but it’s not easy and there is still significant risk involved. Proceed with caution.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

32 comments:

  1. 1
    ray pepper says:

    if u have to ask the question it shows a LACK of understanding of the Seattle market……………..the Answer is NO to this partucular “investor” unless he doesn’t mind picking up a rental because that is where most soured flips end up.

  2. 2
    David Losh says:

    OK, I love this. In San Franscisco you made $59K. Here in Seattle that is possible, but it’s risky.

    In 2006, and 2007 we made $70K, and $60K on two properties we bought, and sold. In 2004 we made $150K on one property. Some investors could make as much as $250K on the right flip in the early 2000s.

    What I’m saying is that the margins are shrinking, and hold times may be longer depending on location, and charm.

    To put it in perspective if it takes you six months to do the flip you are at $120K per year. There are other, less risky, ways to make that kind of money.

  3. 3
    Blurtman says:

    RE: David Losh @ 2 – I assume when you say “made” you mean profit. In the cases cited, how much money did you put into refurbing?

  4. 4
    wreckingbull says:

    I don’t know the answer to the question, but I certainly don’t recommend buying flips. Nothing ruins a home with good bones quicker than someone trying to do a quick flip.

  5. 5
    Drone says:

    I’m always amused to see the “ultra-luxury homes” with premium pricing in decidedly non-premium neighborhoods. If I really had that much money to spend, I’m pretty sure I could find a better location.

  6. 6
    Drone says:

    RE: wreckingbull @ 4
    I hope to never buy a flip, and generally won’t even consider houses that have been magically fixed up and relisted in a space of 6-12 months.

    A fix-and-flip is designed to return the highest profit possible, which means that the remodeling tends to be the cheap “best return on investment” type of stuff. By definition, the best bang-for-buck for the flipper is the worst bang-for-buck for the end buyer. And I’d rather not waste my money that way.

  7. 7
    Macro Investor says:

    You can make money if you have the scale to get cheap materials, cheap labor, cheap financing and easy permitting. If you’re just a small timer paying full retail, there probably isn’t enough money in it to bother. Wait for the next crazy time, when prices are going up fast for no good reason.

  8. 8
    David Losh says:

    RE: Blurtman @ 3

    We are rehabbers, rather than flippers. We go down to the studs in many cases, and do things the right way. It cost a little more to do it, but I figured out dacades ago that sheet rock was cheap, and doing a complete was cheaper than repairs.

    That all said we spent less than $10K on the one we made $70K from because we took that project over from a flipper. The second we spent $30K on, and the hold time cost us, because we had to do it like three times to get it right.

    The one we made $150K on we bought from an auction buyer who kept the buildable lot. The new house added to the value, and it was a win win.

    In times when there was a “distressed” sale market there were more opportunities to find GEMs, now things are kind of marginal.

  9. 9
    David Losh says:

    RE: Macro Investor @ 7

    That’s all true. The profit is made on the margins of having a system in place. I had the same lender, and escrow for twenty years. Guys who worked with me had successful contracting businesses, that we also supplied with labor. We supplied casual labor, and the finish work is what we paid for.

    Also it was easier before the auctions became so popular. Dean Street with John L Scott had an investment group that doubled in sized about 2003. Vestus started, along with a couple of other organized investment groups. Competition was fierce for choice properties, but there was also an after market for people doing quick turns of property.

    Investing in Real Estate, like anything else, is a risk. In my opinion today it’s a bigger risk than ever before.

  10. 10

    By Drone @ 6:

    RE: wreckingbull @ 4
    I hope to never buy a flip, and generally won’t even consider houses that have been magically fixed up and relisted in a space of 6-12 months.

    A fix-and-flip is designed to return the highest profit possible, which means that the remodeling tends to be the cheap “best return on investment” type of stuff. By definition, the best bang-for-buck for the flipper is the worst bang-for-buck for the end buyer. And I’d rather not waste my money that way.

    Some flippers do decent work and some it’s all cosmetic. So I wouldn’t generalize.

  11. 12

    RE: Howard @ 11 – It’s hard to make money on a 1.5 or less bathroom home. So I wouldn’t go that low.

  12. 13
    kfhoz says:

    Better be careful about permits on previous work on a house, also.

    Example: Suppose you buy a distressed house from the auction, and the old now-defaulted owner put in a lovely new RV barn without permits, or without getting the permit work fully inspected and signed off. You could find yourself paying extra to rip out a key asset to the property in order to sell.

    It takes a great deal of time to research each house that you might want buy in order to flip.

  13. 14
    wreckingbull says:

    RE: kfhoz @ 13 – This is a subject that interests me.

    About six months after I bought my home, a county operative showed up and wanted to poke around. I don’t mean drove by, I mean drove up the driveway, got out and knocked on the door. I did not let him in the house, so he had to do his work from outside. He asked me questions about the condition of the home, but it should have been obvious – it needed work. Do the tax guys share data with the planning guys? My guess is that the answer is ‘yes’. I suspect it was more about establishing a ‘baseline’ for permitting purposes than collecting information for tax equalization.

  14. 15
    David Losh says:

    RE: Howard @ 11

    I was talking about this the other day, that I see better deals above $750K. The risk however is huge, because the buyer pool is smaller.

    We paid $108K, and $130K for the two in Seattle we rehabbed, in order to sell for close to the sweet spot of $250K.

    When you buy low you need to buy real low to make profit, but the risk, if priced well is lower.

  15. 16
    David Losh says:

    RE: wreckingbull @ 14

    I suspect that planning may talk to the assessors office. There have been a couple of times the assessors office asked about properties that I know of. One was mine, the other the assessor asked me if I knew what was going on in another house.

    Ours was worked on without permits, the other was obviously done without permits. There must be some mechanism in there.

  16. 17

    Would I Recommend Flips?

    It depends on a lot of things, it might be a profitable venture:

    1. If you have your own time to invest in it to save contracting costs and invest sweat labor[i.e., you’re between jobs].
    2. You’re single….it would be hard with a spouse around, specially financially if they didn’t work too.
    3. You have ample cash, mortgaging the work could become a curse, if it raises the price too high.

    What do you do with the real estate if you do the flip work and can’t get enough money to pay for it? This mexican restaurant had one answer, but they were caught doing it:

    http://seattletimes.com/html/localnews/2019380885_apwalynnwoodrestaurantfire.html?syndication=rss

  17. 18
    Howard says:

    By softwarengineer @ 17:

    Would I What do you do with the real estate if you do the flip work and can’t get enough money to pay for it? This mexican restaurant had one answer, but they were caught doing it:

    http://seattletimes.com/html/localnews/2019380885_apwalynnwoodrestaurantfire.html?syndication=rss

    Where does it say anything about the owner’s being involved???? (They might be)… It just says arson?!?

    If one can buy at auction at a discount, cover carrying and renovation costs as well as have the stomach for the risk.. Of course flipping can make money. I would say that the days of no experience and being sucessful are long gone.

    As a primary residence purchaser, I am starting to believe I would rather take the risk of buying at auction than buying a flip…. There is more upside to me as a long term roof over my head.

    I would rather be bidding at an open auction on a foreclosure than be bidding over a weekend through brokers who are not looking out for my best interest. I went to an open house on Sunday in Kirkland, 20-30 people there, and 5 “bids” before the weekend was up.

    At least at trustee sale things are out in the open…

  18. 19

    By Howard @ 18:

    I would rather be bidding at an open auction on a foreclosure than be bidding over a weekend through brokers who are not looking out for my best interest. I went to an open house on Sunday in Kirkland, 20-30 people there, and 5 “bids” before the weekend was up.

    At least at trustee sale things are out in the open…

    Nothing is out in the option at a trustee’s sale. There is no information given at all about the condition of the house.

    You’re totally ignoring your inspection rights. You’re basically saying that taking a property “as-is” which is in unknown condition is preferable to one which has been fixed up where you can inspect the results. The former situation is much more risky.

  19. 20
    Howard says:

    By Kary L. Krismer @ 19:

    By Howard @ 18:

    I would rather be bidding at an open auction on a foreclosure than be bidding over a weekend through brokers who are not looking out for my best interest. I went to an open house on Sunday in Kirkland, 20-30 people there, and 5 “bids” before the weekend was up.

    At least at trustee sale things are out in the open…

    Unless you befriend the owners before the auction… We have had a professional inspection as well as a general contractor look at two properties that have been given NTSs. Will they sell at auction for less than what is owed.. That is the question that I have not been able to answer. We have also had an appraisal done on one of the houses..

    Will it work… I don’t know, but I will write/blog about it when its done.

    Nothing is out in the option at a trustee’s sale. There is no information given at all about the condition of the house.

    You’re totally ignoring your inspection rights. You’re basically saying that taking a property “as-is” which is in unknown condition is preferable to one which has been fixed up where you can inspect the results. The former situation is much more risky.

  20. 21

    RE: Howard @ 20 – Yes, I have mentioned in the past that bidding on previously listed houses can reduce your risk. That assumes the owner doesn’t trash the place after you’ve gone in.

    Surprising to me at least is the owners most likely to vindictively trash a house seem to be some of the more expensive houses. Apparently it’s the bank’s fault that they bought more than they could afford. /sarc

  21. 22
    ex-WA says:

    RE: Kary L. Krismer @ 19 – In my experience, inspections as carried out by licensed inspectors are a joke. They can’t look inside walls or do anything that might damage the structure even slightly, which means they won’t find the most egregious problems (e.g. mold or damage inside the walls). I think they can also be in effect working for the broker not the buyer, which appeared to be the case when we sold our last house – meaning they don’t want find problems, and the buyer’s broker doesn’t want to find problems either. In the case of a flip, having a real inspection is doubly important, to find problems underneath the cosmetic fix-ups.

  22. 23
    David Losh says:

    RE: David Losh @ 15

    I was thinking today of what a fluke it would be to buy a property, any property today for $108K, or $130K, especially in Seattle proper. In addition the one we paid $130K included $30K to person who was trying to flip the property. She had paid $100K, in Greenwood.

    How’s chances today of getting that pricing?

  23. 24

    RE: ex-WA @ 22 – I would agree there are a lot of inspectors that aren’t any good and/or don’t know what they’re doing. But a good inspector can find a lot of things out about a house. Sure they can’t see through walls, but often they can tell you when they’re concerned about such matters.

    A good percentage of deals do flip on inspection, so the inspections clearly are not worthless.

    As to cosmetic fix-ups, a large number of those were bank owned properties. They go in and paint, recarpet, etc., but don’t fix any of the underlying problems. They just make it look good. Appearances truly can be deceiving.

  24. 25
    Christy says:

    We purchased in March 2012 after looking at over a hundred homes in core Seattle neighborhoods (south of 85th, north of downtown and west of I-5) for over a year. We saw quite a few obvious flips. My main issue was that the quality of materials and craftsmanship in flips was quite poor. On close inspection they looked sloppy and too trendy. Who wants to buy that? We ended up buying a non-flip from owners who had lived in the home 13 years and made quality updates over the course of their tenure. We were very picky but so are other buyers these days. Maybe the low inventory has loosened standards, but I’d be careful in terms of the quality you put into it if you flip.

  25. 27
    Howard says:

    Speaking of flips..

    I would have thought they would have chosen some more neutral colors, granite and finishes
    http://www.redfin.com/WA/Kirkland/13512-87th-Ave-NE-98034/home/278462

  26. 28
    Howard says:

    By JVP @ 26:

    I was doing flips full time for about 4 years, but recently got out of it to instead focus on full time RE sales.

    It’s gotten hard to do flips. Several reasons for this:
    * Rents are up and rates are down. Landlords can pay a lot more than flippers.
    * Auctions have gotten popular with the masses. To many bidders, and the auction brokers are good at marketing.
    * Fewer properties at auction than 18 months ago.
    * Lack of inventory; REO’s and shorts are selling for more.
    * Most buyers can’t do math. I hear all the time “I made 60k”, but these numbers rarely include all the transaction fees or financing costs. The press is horrible about this.

    There’s a few people or companies who do well, most people who try lose a fair bit of money and/or time. The law says you need to be contractor, and almost all the pro flippers are. You darn well better have excellent subs who are good and cheap.

    It’s a great time to buy rentals. That’s where the smart money is going right now.

    So who is most prevalent bidding at auctions? Landlords, Flippers, or Home buyers?

    I have not spoken with a successful “home buyer” who bought at auction.. (Eastside, Redmond, Kirkland, Bothell)

    It seems to be down south (Renton, Federal Way, Auburn and Kent)…

  27. 29
    Topdog says:

    Very difficult and risky to do a flip in anything but a hot price appreciation market. The finance, buy and sell transaction costs are too high to leave much if any profit.

  28. 30

    By Topdog @ 29:

    Very difficult and risky to do a flip in anything but a hot price appreciation market. The finance, buy and sell transaction costs are too high to leave much if any profit.

    For experienced flippers, post 26 would refute that, as would the flip which occurred in my neighborhood in 2008. For inexperienced flippers that is likely true, because they are likely to make many mistakes, the first of which may be fatal: Picking the wrong property.

  29. 31
    Blurtman says:

    RE: David Losh @ 8 – It is interesting that you could sell these houses for $80k and $90k more than you paid. Did you underpay for these homes intitially? Hard to believe that by investing $10k, you can sell a house for $80k more than you paid. I am not at all doubting what you say, just wondering where the inefficiency is. How amazing were the granite countertops? ;>) Sounds like an incredible arbitrage situation to me. Have you considered Wall Street as a future career?

  30. 32
    David Losh says:

    RE: Blurtman @ 31

    Back in the day, before every one was a Real Estate expert, you could expect $100K from a buy, and sell.

    The one for $130K was bought from a mom who bought the house for $30K and her son lived there for 15 years. She was happy to sell for $100K because the place needed work. The woman who bought it was my client. My deal with her, as with some others, was that if they decided they didn’t want the deal, I would buy it back from them. That is what we did. I paid her the price of the property plus the $30K. She paid all selling cost, but not the commission.

    The other one was a house we worked on for the seller. The more involved we got the more distressed the seller was. He bought the property, lived there for ten years, and hated the whole thing. He sold to us just to be done with. We used our work as a phantom second to make the purchase.

    If you think about it, before the bubble, properties appreciated slowly. In the 1990s thing went sideways, and continue sideways up until today. People used to own property free, and clear, inherit it, or end up with the property by divorce, or other means. It just wasn’t that big of a deal. So when some one sold for $190K and the property got to be worth $450K the profit was easy. That has also happened to us. We sold a place for $190K, and in a few years it was sold again for $450K, and I doubt the seller did anything.

    We only used granite tile in one house to replace some tile work. We build out boxes and leave the finish to other. I’m a good systems kind of guy.

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