Real Estate Investment – Has Home Flipping Become a High Risk Business?

Builders, entrepreneurs and handyman homeowners have used this method with great success for many years by purchasing distressed or foreclosed homes, making repairs and upgrading and then reselling them.

The recent trend to flipping may be driven by television shows that highlight the trials, tribulations and successes of such renovations. In the past few years even unskilled investors have been able to profit by hiring contractors and buying and selling in areas where housing prices were rising rapidly.

In the past two years, many of these investment homes have joined family residences on the foreclosure lists. Buyers too often relied on high interest, short term equity loans or constructions loans to finance renovations. Without the knowledge to do the physical labor themselves, buyers have found their projections of time required to complete the project to be unrealistic.

The high cost of good contractors and the unreliability of cheap contractors have combined with falling home values and a tightened mortgage market have ended the dreams of many wannabe house flippers. While some investors simply ran out of money before the work was completed, others realized they could never recoup the money spent to improve the property and realize a profit, too. For many it has been easier to just walk away.

For some transitional neighborhoods, the result has been a further decline in neighborhood property values as partially remodeled (and uninhabitable) homes become available as foreclosure sales. Instead of the outdated home for sale on their street, homeowners may see a partially demolished property on a lot littered with construction debris.

There is a human toll as well. Though smart investors understand the necessity of forming a business to protect their personal assets, many people jumped into a property purchase using their personal credit as a guarantee for the loan. For them, the economics of an inability to successfully renovate and resell a property quickly escalated into a personal financial crisis.

Property flipping is not for the faint of heart (or the low of budget). Though the foreclosure crisis may be a boon for investors able to buy and hold properties until the market improves, it is critical to have the knowledge of where to buy and what price the market will bear.

For newer entrepreneurs with visions of quick profit, the risk has increased dramatically. Only those with the expertise to do some of the work and the money to carry the property for an indefinite period of time should even consider trying their hand at property flipping in the current housing market.

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