As a house flipper myself, I tend to watch a flipping show on television once in a while. Some of the shows I enjoy, some of the shows are a little over the top, but they all have one thing in common. Television house flipping shows are a very bad portrayal of what it is really like to flip houses. Not only are they not accurate at portraying what it is like to flip houses, but they teach some really bad lessons with the houses they buy and profits margins they go after. The two shows I analyzed are Flip or Flop and Flipping Vegas, which I see the most often and are the most recent. I remember watching flipping shows in the past like Property Wars, Flip This House and more are not any better and most of them much worse than the shows I will discuss.
What is the basic premise of house flipping shows?
House flipping shows are meant to give a in-depth look at house flippers, how they find houses, how they repair them and how they sell them. Television like to show conflict and drama, which usually happens when you are repairing houses and dealing with contractors and surprises. While we usually get a great look at the rehabbing process the flipping shows tend to leave out the most important part of flipping; finding awesome deals and paying for them. I think most people could make money on a flip if they were given a deal that had enough room in it and all they had to do was find some contractors and get it fixed up. I am not saying it is easy to find great contractors who work for a reasonable amount of money and will complete jobs in a reasonable amount of time, but it is only a small part of flipping. The flipping shows do no show the hard work that goes into finding deals, financing them and selling the houses as well.
Does HGTV’s Flip or Flop do a good job of portraying house flipping?
Flip or Flop takes place in Southern California, a very tough market to flip in. However you can flip in California if you have the cash and are willing to take some risks. Tarek and Christina are the stars of the show and are a husband and wife team. I have watched many episodes of Flip or Flop, but honestly it has been a while, so I watched an episode over Thanksgiving break to refresh my memory on their process and numbers. On the episode I watched they bought a $520,000 property and planned to sell it for $675,000. That leaves a ton of room right? Well let’s look at the numbers they give us.
- $520,000 purchase price
- $70,000 rehab budget
- $30,000 closing costs
- $620,000 total investment
- $55,000 profit potential!
First off making $55,000 on a $500,000 plus flip is crazy if you ask me. If anything goes wrong on a flip in that price range your profit is gone. I like to use the 70 percent rule to give an idea if a house is worth flipping. The 70 percent rule states the purchase price on a flip should be 70 percent of the ARV (after repaired value) minus the repairs needed. For this house the 70 percent rule states they should have bought it for:
$675,000 x .7 =$472,500. $472,500 – $70,000 = $402,500.
While the 70 percent rule is not always the perfect way to judge a flips potential, it is usually pretty close to accurate. I pay more than 70 percent in some cases, but I am also a real estate agent which saves me money. Christina and Tarek are also agents and so they save money as well. If we go up to 75 percent of ARV minus repairs they should have paid $436,250 for the house.
Were Christina and Tarek from Flip or Flop able to make money on this deal?
According to HGTV, Tarek and Christina did make a profit after all was said and done. The house a previous flip that had gone wrong and unfortunately they gave us almost no information on how they were able to find the deal. They also paid cash for the house and used their own cash for all the repairs. They went over budget on the repairs, mostly because they decided to spend $30,000 on landscaping. The contractors were very good and very fast. I have a really hard time on my own flips getting my contractors to work fast and I was impressed with theirs. Of course I do not know how many house flips they have going at once, I have eleven going right now!
After all was said and done they ended up spending $124,600 on the remodel, but they were able to sell the home for $725,000. Here are the final numbers they gave us:
- $520,000 purchase price
- $124,600 repair cost
- $30,000 closing costs
- $725,000 selling price
- $39,000 profit!
$39,000 profit on a house that sells for $725,000 is a horrible profit margin! But, they didn’t really make that much money either. The closing costs were low and they left out many costs. First off the real estate commission on one side of the sale would be around $21,000. Since they are real estate agents they may not be paying a listing side commission, which makes sense. After title insurance, closing fees and other costs they are pretty close with their $30,000 figure, but if you are not an agent plan for much more. They also left out these costs that most flippers will have:
- Carrying costs: While you own a flip you must pay for utilities, HOA fees, insurance, taxes and more. These costs on a house in this price range would probably be at least $5,000 to $10,000.
- Buying costs: While the buying costs are usually minimal on most properties, you will have to pay part of the closing fee, sometimes title insurance, recording fees and more. Many times investors pay for more items than usual in a purchase to entice the seller to sell to them at a great price. There was most likely at least a couple thousand dollars in buying costs.
- Cost of money and labor: Even if they pay cash for this property, that money could be used for other things. It is not free money as they portray it. They needed at least $645,000 in cash and probably took at least 3 months to complete the flip. If you made 5 percent interest on that money you would make $8,000 in that three months. On these flips Tarek and Christina are shown doing much of the manual labor. This could just be show for television, but of they are doing manual labor they should not be working for free! I won’t count these costs, but they are something to consider.
If you were to add the $10,000 to $15,000 in extra costs they did not count in this episode the profit is under $30,000 and that is from a sales price that was $50,000 higher than they first thought! That also does not consider the cost of labor or money that we ignored. These numbers show why they never should have bought this house in the first place and were lucky to make anything. If you are wondering why they bought it, well they have to flip houses to have a television show and I am sure they make decent money from the show itself.
Does Flipping Vegas give a more accurate portrayal of flipping houses?
Flipping Vegas is entertaining for me. For one thing the star Scott Yancy has some awesome cars and I am a car guy. Besides the cool cars, the show is even less accurate than Flip or Flop. Here is a quick run down of the show:
- No time spent on telling us how they found the deal
- He uses multiple real estate agents to find him deals and sell houses
- The show is all about drama and Scott yelling at his contractors or wife who is an interior designer
- He does a lot of the work himself as well
- They are not real estate agents as far as I can tell
On the episode I watched he bought a house through a real estate agent that was site unseen. I thought that was a little weird, but it is possible. It could also be created by the television producers to be more exciting. I buy houses site unseen, but they almost always have occupants in the house and this house was vacant. When they get in the house they see mold and water damage everywhere even though the information they were given says all the issues were taken car of. If this happened in real life you could definitely go after the seller for misrepresenting the condition of the home. Here are the numbers they give us:
- $225,000 purchase price
- $20,000 estimated budget
- $305,000 sales price
- $60,000 potential profit
If we used the 70 percent rule on this house they should have paid $193,500. They find more mold than they thought and then they all have to where full mold suits with respirators when they go in the house. I was wondering how I am still alive after all the mold houses I have been in, the way they freaked out on the show. They figured on $10,000 to $15,000 more just for mold removal, which is a lot of money if you ask me. After all is said and done the rehab ends up costing $45,000 and they get an offer for $349,000 for a profit of $79,000.
How are the numbers skewed on Flipping Vegas?
They left out a ton of costs on Flipping Vegas! Here is the short list:
- Selling costs: They had to use real estate agents to sell the house which would have been around $25,000
- Carrying costs: They left out taxes, insurance, utilities, etc, which would have been $5,000
- Buying costs: I am assuming a couple thousand dollars for the buying of the house
- Labor and cost of money: Again this was an all cash purchase with no costs listed for financing or labor that Scott did himself.
After figuring the real costs on this flip you see that he actually made less than $50,000 and that was on a price that was $44,000 higher than first thought. This was another deal that never should have been purchased and a gross misrepresentation of the profit. I watched a couple of other Flipping Vegas episodes and they did the exact same thing.
How much would financing cost on these properties?
Almost every house flipping show leaves out costs associated with buying, holding and selling the home. Flip or Flop does a better job than most, but still instills some very risky tendencies. The biggest problem with the house flipping shows is they assume all the flippers pay cash for their deals and have an unlimited amount of money. This is not realistic! I want to show an example of what it would cost me to flip a house like they flipped on television. I use a mix of bank and private money to finance my deals.
- $520,000 purchase price
- 75 percent financed
- 5.25 percent interest
- 1 percent origination fee
Total financing costs for six months would be $15,437 for me and I have a great deal with my bank. That would also assume I put $130,000 down and pay for all the repairs out of my own pocket. If you used hard money, which is very common with flippers the rates would be 12 percent or higher with at least 2 percent origination fees. You could finance more money, but it would cost you almost $50,000 in financing costs!
You may say you wouldn’t have to hold a flip for 6 months, but that is a very common time frame for me and most investors. Here is an article with more information on how long it takes to flip a house.
What other problems do I see with house flipping shows?
There are a few more things that bug me about house flipping shows.
- Open houses: every show is focused on the open house date. The house must be done and ready to go by the open house. I understand having a date to finish the project and that probably helps motivate the contractors, but I have never had an open house right off the bat. I put the house up for sale and 90 percent of the time another Realtor will sell the house for me. Open houses rarely sell the houses they are stage at, but they are great at getting buyer leads for agents.
- Added value for repairs made: Most of the shows will tell people how much each repair adds to the value of the home. I remember in Property Wars they would add and deduct values for repairs found or features the buyers did not know about. You cannot say a remodeled bath will add $2,000 to the price or a new kitchen will add $10,000 to the price.House valuing does not work that way. You have to look at the comparable sales and see what condition they are in. If your house is in similar condition than it is worth close to what other similar properties have sold for. If you fix up the bath, the kitchen, but forget to repaint the house those repairs will not mean much. You have to look at the big picture, not each individual repair. When you buy a flip unseen, you assume it needs a ton of work.
- The stars of the show are doing manual labor: Most big time flippers do not spend time working on their houses. They hire people to do all the work and concentrate on more lucrative activities like finding deals and building their business bigger.
- They leave out the most important parts of flipping: I already mentioned this, but I have to say it again. They toughest part of flipping is finding awesome deals. They barely mention how they find the deals on the flipping shows and after analyzing them, we see they are not that great of deals and properties I would not buy. They do not show the process of finding contractors, they do not show the financing aspect and they do not show how to find awesome real estate agents.
- Most flipping starts have their own house flipping system: Most of the flipping stars have endorsed flipping systems that are advertised heavily with seminars. Please know that the people you see on TV are not the ones teaching you in these programs. You will pay $30,000 plus to be coached by someone who may or may not have a clue what they are doing. (FYI, I have coaching programs that are much cheaper, will teach you more and are taught by me. Shoot me an email if interested Mark@investfourmore.com)
I would love to see an accurate flipping show that portrays what it is really like to flip houses. I love shows like Bar Rescue, Hotel Impossible and The Profit, because the show more of the business side. They go into the numbers and processes for making money. I have been approached a couple of times about doing a flipping show after people saw my YouTube videos, but nothing has come of it yet. I think it would be fun to be on Television, but I have enough to keep me busy without it. I am not sure I would be exciting enough or have enough drama going on to make it.
by Mark Ferguson at www.investfourmore.com