The (Art of the) Flip

To flip or not to flip, that is the eternal question. There are some real estate critics, and depending on what the media reports, one might think that flipping was some sacrilegious act that preys upon innocent builder/developers and destroys entire master planned communities in its wake. Some people even think of the “flip” as a four-letter word. The reality of it is that flipping can be a good thing for both developers and investors and/or a bad thing depending on how it’s approached. And depending upon how it’s executed, it can be profitable or a bust.

Many factors play into this equation. Later articles will expound upon this circumstantial roulette that is largely dependent upon the investors’ execution power, which-depending how it’s executed-could be the difference of walking away with $10,000 or $60,000. It should be kept in mind that walking away with $10,000 is not a good thing. Walking away with $10,000 means you’re lucky that you didn’t have a wash. In real estate home pricing, unlike other items of retail buying, you don’t reduce a property’s asking price by $500! Normally, price reductions are anywhere from $5,000, $10,000, $20,000, or sometimes more, depending on the value of the home. With that in mind, walking away with $10,000 means you’re about a hair away from walking away with nothing or potentially writing a check at escrow. That’s not a good thing.

Let’s take for example, in terms of the upside, walking away with $10,000 or $60,000 on a flip. Assuming one buys a property that goes up $80,000, and depending upon the entry and exit strategy of the investor, the net and gross can be materially and substantially affected. These elements are crucially important. Items that make a difference on the bottom line include loan selection. Other items include the selection or nonselection of upgrades, and about selling the property yourself. In short, there’s a multitude of elements that will contribute to a profitable or nonprofitable transaction. These are very important to cover and to remember, since they establish the core of a good investment strategy. To be clear, and for definitional purposes, a flip can occur on any type of property, irrespective of its age, and whether or not it’s residential, commercial, retail, or office. However, for purposes of this article, the focus is on new tract houses only. To recap, and notwithstanding the latter mentioned bullet points such as loan selection, design option selection, or choosing to sell the property yourself, all of these items play an integral role and have a determinative effect on proper execution and net profit. Since without the proper execution, the flip may become a bust.

There are also other important elements regarding the flip besides the aforementioned, and one of these elements is priceless. And that is that flipping is fun! Personally, I can’t think of a lot of individuals who I know in the industry that don’t love making a lot of money. The “priceless” element is that they enjoy flipping deals and are answerable only to themselves. The fact is it’s a great way to make money, since that’s where the action is. At the end of the day, flipping has a high velocity rate to it, and people enjoy the rush. There is no comparison. And compared to a stabilized portfolio of properties, it’s like watching paint dry. In terms of a high, flipping has got to be comparable to fly-fishing or parasailing. There is just this certain rush that comes over you when things go right.

When you witness the end product of your efforts, it’s an avocation that can really be pleasurable. Other attributes of this avocation: you’re in and out and no one gets hurt, plus the property is normally defect-free. Used property can have additional problems during the reselling process, including defects, which result in additional costs. In short, new tract housing presents very little risk in terms of warranty defects given its newness. It still has that new-car smell and reliability. Plus, the flip is a great and exciting way to make money, either it be three to four homes a year or twenty to thirty homes for the more aggressive buyer. It’s a way of life that never presents a dull moment. It also provides the opportunity to travel, to go to places that you’ve never been before, and/or to educate yourself and learn about new markets.

(The latter passage was an excerpt from the recently released book, The Flip: The True Life Story of How a Successful New Tract Home Investor Went from Zero to Hero, Back to Zero. To learn about Mr. Potter’s expertise, go to http://www.theflip.tv and discover why New York Times bestsellers, PhD’s, and HGTV hosts have raved about The Flip, a real estate docu-fiction which chronicles the real estate crisis before, after, and now. The book was also an Amazon Kindle reader bestseller).

As a member of the National Association of Realtors and the National Association of Home Builders, D. Sidney Potter began his real estate career in 1992 as a mortgage operations consultant for Synergy Consultancy Group, and proceeded to work for Marcus & Millichap and Sperry Van Ness as a commercial real estate broker selling shopping centers and storefront retail.

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