The flippers are back. They’ve pushed away from their desks at their mortgage broker job or their real estate job, or they’ve handed back the keys to the demo car they’ve been driving while on duty at their car salesman jobs, and now, they’re back. They’re back painting and tiling and drywalling and then painting before the drywall mud dries and putting down carpet before the subfloor leveler dries. And once those things are done then they’ll be outside sodding the front lawn and planting impatiens just before the Realtor sticks the sign in for the first, and maybe last, open house. This is real estate today, and it’s looking an awfully lot like the real estate from before.
When I say these flippers are back, I only say this because the Wall Street Journal told me. I say this because HGTV told me, and I say this because there’s some guy in Las Vegas driving all sorts of new Porsche’s that he, presumably, purchased because he’s making so much money flipping homes. When I say they’re back, I mean they’re back everywhere except here. Here isn’t Southeastern Wisconsin or Walworth County or the Lake Geneva area. Flippers exist and have the potential to thrive in these broad markets, but the here that I’m speaking of is the only here that matters- the Lake Geneva vacation home market. That’s our here, and flippers? They need not apply.
The best flippers excel in large markets. The guy in Las Vegas? Probably actually making a killing and he probably deserves to drive those fancy cars. The sorts of guys in the Phoenix market who are doing what he does in Vegas, also likely crushing it. They are doing so because they are in large markets and large markets operate under a totally different set of rules than do small markets. Even some small markets, by inventory measurements, can be home to successful flippers. There’s reason to believe that even today in Lake Geneva there are opportunities for flippers to buy for $65k, slap on $20k of lipstick and then sell for $120k. First things first, while this is possible even in this small market, consider the benefits of such an endeavor.
If I buy a dump for $65k, let’s assume I’m the buyer that does this often, and as such, I have cash to spend. I spend $65k on the house, which works out to closer to $65,500 once I pay the title company charges and record my deed. I then proceed with my $20k renovation. I’m all in for $85,500. I have Realtors over, and they tell me they LOVE the red wall I painted in the dining room. No big deal, I say, basking in the faux praise. I list the home with the Realtor who wears the largest fake pearls, and my price, $119k, is deemed to be reasonable. The open house occurs, and a buyer, A BUYER!, makes an offer. Since this isn’t television, and Sandra Rinamoto is no where to be found, they do not offer me full price. They do, however, offer me $105k, and I negotiate to $112,500. As part of my concession, I agree to credit the buyer $2k at closing to cover their lender fees. Onward.
At closing, this is my math. I sell for $112,500. Minus $2k closing cost credit. Minus $6750 for broker fees. Minus $700 for title insurance. Minus $337.50 for transfer tax. Minus $75 for deed prep. Minus $200 to have the survey re-stamped. Minus $195 for the Home Warranty I had to buy this buyer when they got cold feet about the age of my furnace. My theoretical net is $16,742.50. I tied up $85k of cash for three months, and while it was only earning me 1% in the bank, I still lost out on $210 in interest. $16,532.50. Since I sold this home and didn’t own it for any extended period of time, this gain was taxed at ordinary income, and since I’m a big shot theoretical flipper and I drive several different Porsche’s, my tax bracket for Federal and State is a combined 35%, leaving me with $10,746.12. For three months of effort. Not all that exciting, is it?
But that wasn’t the point. The goal here is to explain why flipping homes in a small market doesn’t work all that well. Specifically, why flipping lakefront homes on Geneva for potential obscene profits doesn’t work so well. The reason has nothing to do with broad market forces, or interest rates, or the like. The reason it doesn’t work here is because in small markets everything is noticed. Buyers pay attention, and unfortunately these buyers also have keep memories. If I’m a lakefront buyer and I pay $3.25MM for a lakefront home, hurray for me. If I take that $3.25MM home and put $1MM into it to make it beautiful, and I ask $4.875MM for the home, attempting to sell for a reasonable, if small, profit, then my odds of achieving success in this context are quite favorable. The market remembers what I paid, the market can see the work I’ve done and the money I’ve spent, and to save the stress and misery of undertaking a remodel some buyer may well pay me a modest sum for my efforts of both time and resources.
Now, consider that I purchased that home for $3.25MM and now I want to sell for $4.875MM, not because I did any serious work to the home, and not because the market warrants it, but just because I feel like it. Are you a buyer? Anyone? Takers? Offers? Anything?! Even if the market can somehow support my new claim of value, will buyers flock to my door to reward me in such a lucrative manner? Probably not. They won’t do this because they know what I paid and they are nothing if not intelligent. This is why sellers of such properties rarely succeed here. The market has a memory, and the only way to secure such an immediate gain is to look for a new buyer. New buyers might not know my history, new buyers might not understand what it is that I’m doing. New buyers just might reward my bravado.
This is why new buyers should work with me, David Curry, so we can avoid these sorts of things.