We’ve all watched the TV shows where a house with a sagging roof, backed-up plumbing, broken windows and a pool full of alligators is purchased for nothing, and then magically turned into a beautiful rancher that’s bought for a lot by an equally beautiful family – in an hour.
It’s called “flipping,” and it rarely goes as easily as seen on TV.
Aaron Cunningham knows what he’s talking about. He’s the CEO of Inland Capital, and together with business partner John Urquhart, he estimates he’s been part of 400 flipping projects since 2003.
“The myth of the TV show is that you can just do this right away,” Cunningham said. “In reality you have to do a lot of houses before you get really good at it.”
And you can’t start with nothing.
Cunningham said his clients have to start with between $30,000 and $40,000 in cash. The size of the starting capital depends on the market.
“In Seattle, our clients start with three or four times as much,” Cunningham said. “Some companies advise you to run up your credit cards for a flip. I would never recommend that.”
The most important thing is not the location, but whether the flipper gets a great deal.
“If you don’t buy for the right price, then nothing else matters,” Cunningham said.
Competition for property in so-called good neighborhoods is higher, driving up prices compared to less desirable areas or smaller communities.
“Everyone wants to live on Manito Boulevard, but I’m more interested in the good deal in Deer Park,” Cunningham said.
When the number of foreclosures topped a couple of years ago, there were a lot of neglected properties auctioned off every week.
The number of foreclosures has gone down, Cunningham said, but people still unload their homes for a variety of reasons.
“I hate to sound too much like an undertaker, but as long as we have death, divorce and job loss, there will always be properties out there,” Cunningham said.
Nuisance houses may be perfect candidates for flipping, though some require an extreme amount of rehabilitation, like the North Cedar Street home Lee Arnold of Cogo Capital bought and flipped earlier this year.
That home had no working plumbing or heating – the occupant burned pieces of the walls and used a bucket in the backyard as a toilet.
Arnold gutted the house, finished the basement, added a bathroom, gas heating and egress windows. The house went on the market for $189,900 in early February and had a full-price offer within a few days. Arnold said Cogo put about $85,000 into the rehabilitation, making it one of the company’s more profitable flips.
The biggest pitfall, according to Cunningham, is perhaps also the most difficult to avoid: Do not get emotionally involved with the deal.
“Everyone sees a house they really like and think it’s going to be just like that TV show,” Cunningham said. “If the price isn’t right, then it’s not.”
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