The rise in popularity of fix and flip reality shows like “Flip or Flop” and “Flipping Vegas” have more people than ever interested in real estate investing. The glamorous remodels, huge profits, and quick turnarounds make real estate investments seem like an incredible money-making opportunity – which it can be, if investors know what they are doing. While glamour, profit, and speed are all present in the industry, the shows can exaggerate the degree to which they exist out in the real world.
It is true that house flipping can provide huge financial returns as well as a lot of freedom: ABL has funded over a thousand fix and flips, the vast majority of which resulted in profit for the borrower. The issue is that not every potential investor does enough research beyond the shows that inspired them to understand what the process is really like. If you’re reading this article, though, you are clearly off to a good start in getting to the reality behind the reality TV.
Let’s take a look at some of the things reality TV shows leave out.
Often, reality TV flippers use their own money (or the network’s money), which is not feasible for most investors – especially not beginners. Hard money lenders are a great solution for people who lack the cash to fully fund a deal and want to take advantage of a potential of real estate investment – but any loan is going to be more expensive than using your own money.
With any loan, you are going to have to pay some fees in the process of closing the deal, as well as pay interest over the course of the loan. Although these fees and interest may not seem like much, some of the flips that reality TV hosts can do – like a $216,800 renovation budget for a $10,200 profit – would not be at all reasonable for the average investor. Not only does an investment like that leave little to no wiggle room for unexpected costs, but the payments associated with a loan are going to eat up most of your profit before you’re even done with the renovation. A lot of risk for a little reward simply doesn’t make sense.
In addition, the labor costs listed on the episodes are often unrealistic for non-celebrity buyers. For construction companies, the visibility that a show like “Flip or Flop” provides is extremely valuable. For stars like Tarek and Christina el Moussa, contractors may be willing to slash costs and, in some cases, even work for free. When hiring outside labor, you shouldn’t count on kind contractors lowering their prices because you based your budget on reality TV math.
Everything happens faster on TV. In the course of a 30 minute episode, you get to see a total mess transform into a sleek home. It’s important to keep in mind that your fix and flip journey doesn’t begin on the first day of construction.
Before you start knocking down walls, you need to find a property, figure out how to fund it, put together a renovation plan, and purchase the property. In the shows, the first property the hosts investigate tends to be the one they renovate because the producers don’t want to waste valuable air time on leads that don’t pan out. In real life, you’re probably going to need to investigate a few homes before you find something with a low asking price and a lot of potential.
In addition, the actual renovation on the shows is sped up immensely by the host’s ability to hire contractors to do almost all of the work. More often than not, the “work” the show’s stars do is more about adding value to the program than to the house. The reason they can afford this is that the stars don’t have as much at risk as the average investor. Even if they were to lose money on the flip, Tarek and Christina from “Flip or Flop” make around $10,000 per episode. That’s a nice cushion in case something goes wrong. In your case, if you end up overspending your budget, you’re going to seriously cut into your profits and possibly end up losing money.
Besides the construction discounts stars enjoy, the crews actually work more effectively when they’re on TV than the same crew would work on your low-profile project. When people are observed, they work harder, faster, and better. On reality TV, the workers know that they are going to be watched by millions, providing extra incentive to do the job right. If a construction crew can’t meet deadlines for Scott and Amie on “Flipping Vegas,” they’re going to be seriously hurting their business when the episode airs.
While every house is going to have some sort of unexpected issue – life is never perfect – you should know most of the major problems you’ll encounter before you start work on the house. Frequently on TV, the hosts need to come up with innovative solutions on the spot to keep the flip from flopping. In one episode of “Flipping Vegas,” Scott and Amie actually discover a homeless woman living in the condo they purchased in northeast Vegas. In another, the pair realize that the house they bought had been illegally repurposed as an indoor skatepark and paintball arena. This makes for dramatic television, but in real life a comprehensive business plan and prior due diligence is incredibly important.
If you don’t know that the house’s entire plumbing system needs to be redone before you buy it, how can you know if it’s a good investment or not? It seems like the shows’ hosts are always shocked when they step into their latest buy. Often, the viewer is left with the impression that the buyers never once visited the house prior to the purchase. Throughout the episodes, expenses add up as windows are replaced, floors are redone, and walls are painted. The viewer (and flipper, it seems) is left on the edge of their seat as they wait to see if the massive investment is worth it. Of course, it almost always is – on TV.
Real life fix and flippers don’t add up the numbers as they go. Flipping a house is a carefully balanced equation, with the bulk of the work calculated up front and an additional sum set aside for the (usually) small surprises.
It seems like the fixed houses on TV have potential buyers lining up, and that may be true. People shopping for houses in that area probably know about the show and may even be fans themselves, which means that buying a house from Christina and Tarek has that extra star factor. In reality, a great renovation doesn’t always make a house easy to sell.
The quicker you sell the house, the better off you will be: as properties sit on the market, they lose value. Not to mention the costs you will incur in property taxes, interest on your loan, and maintenance costs as more and more time passes. However, any experienced real estate investor knows that there will always be cases when you end up holding onto a house for a few months longer than you had hoped.
To prevent that, you’re going to need to hire a local real estate agent or, if you are an agent yourself, work hard to find house shoppers and get them excited about your finished project. Of course, if you did your research before taking on the project, you should have an idea of how desirable your house is, which can take away a lot of the worry about whether or not it will sell.
If you’ve been watching professional house flippers and think you are up to the fix and flip challenge, real estate investing is a great way to make a living. If you do it right, you can reap the rewards of good planning and careful renovation.
Maybe someday, you’ll even host your own fix and flip show and inspire the next generation of flippers.