Young investors bored by stocks and bonds looked to residential property as a way to make big money. TV programs that made house flipping look easy were a dime a dozen. Yet house flipping was risky business back in the day. It is still risky today.
House flipping is so risky that some hard money lenders, like Salt Lake City’s Actium Partners, will not even think about funding flipping projects. Yet there are others willing to assume the risks with the expectation of a decent payoff. The thing for house flippers is this: where are they going to go outside of hard money?
It is easy to understand why lenders are wary of house flipping after a detailed analysis of all the risks involved. Below are some of the most common risks both flippers and their lending partners face.
1. Hidden Repair Costs
House flippers cannot pay too much to acquire properties. Why? Because there are always repair and renovation costs associated with getting a property back on the market. Paying too much for a house before repairs and renovations could mean taking a loss at the time of sale. The risk increases with the potential for hidden repair costs.
Mold is a great example here. Unfortunately, digging around for hidden mold is outside the purview of general home inspections. So imagine a house passing inspection criteria and sold for a price barely inside the investor’s limits. The investor goes to repair some damage in the bathroom, damage that requires cutting into the wall. That’s when he discovers an unimaginable amount of mold inside. His repair price tag just went through the roof.
2. Tying Up Funds
Flipping houses is also risky in the sense that an investor ties up their funds until a home sells and finally closes. On average, it takes about six months to turn a house over. During that time, the flipper has tens of thousands of dollars tied up in repairs and renovations. That is in addition to the amount he borrowed to make the acquisition.
3. Real Estate Prices Fluctuate
The time necessary to fully flip a house adds to the risk because house prices fluctuate. In this regard, understand that the steadily increasing prices observed between late 2020 and the end of 2022 were the exception to the rule. Rarely does the market experience such sustained periods of explosive growth.
Normally, six months is an awful lot of time for a strong market to go south. If a house flipper does not time a new acquisition correctly, his expected profits could be substantially less by the time he completes the sale. And unfortunately, there is no accurate way to predict which way the market will go.
4. Flippers Count on Sales
House flipping is a different kind of investment in that it relies directly on selling an asset as soon as possible. In short, flippers count on sales to keep their heads above water. If they cannot sell a property soon after putting it on the market, they also can’t invest in a new property. They need the cash they have tied up in that current property to move forward.
These four risks represent the toughest aspects of flipping houses. There are other risks not mentioned here. This is why house flipping isn’t for everyone. It is risky business regardless of how TV programs portray it. You can make money flipping, but you must be willing to accept certain risks that can ultimately cost you everything.