Flipping
Flipping Homes - Real Estate Investors
By JULIE BENNETT
Sep 18, 2005, 12:52

Beth and Tom Steinkellner bought an ugly Victorian house in Oak Park, Ill., for $65,000, fixed it up and sold it a few years later for $239,000. They also purchased a rundown three-flat apartment building for $150,000, gutted it themselves, and sold it six years later for $330,000, for a gain of $180,000 plus the rent money they collected from the tenants.

But fixing up and selling residential properties is not for the faint of heart. Mr. Steinkellner once broke the seal while fixing a radiator, sending hundreds of gallons of water onto a newly finished floor. When replacing an old light fixture, the couple cut into a hidden gas line. And while Mrs. Steinkellner was perched on a ladder stripping exterior paint, local police thought she was a burglar and almost arrested her.

"Buying a rundown residence and fixing it up yourself sounds like a great idea," says Mrs. Steinkellner, now an art professor at Concordia University in Ann Arbor, Mich. "You even have a place to live while you're working. But everything takes twice as long and costs twice as much as you thought."

"We worked for years and probably earned $5 an hour," says Mr. Steinkellner, director of ConnectAgain, a nonprofit organization, also in Ann Arbor.

Real Estate Flipper Frenzy

Nevertheless, flipping houses for profit is more popular than ever, say Katie and Gene Hamilton, authors of "Fix It and Flip It," (2004, McGraw-Hill), who have renovated and sold 14 houses since the mid 1960s. "When we started," says Mr. Hamilton, "you had to hire a plumber to finish a bathroom because they were the only ones with the tools and materials." Now, thanks to the $176 billion remodeling industry, pipe wrenches, tubs and other construction materials are available at the nearest home-supplies store.

Tax laws favoring home ownership, low mortgage rates and no-down-payment loans also mean that more people can afford fixer-uppers. But perhaps the biggest driver has been the stock market's poor performance. Since the tech bubble burst, more people than ever believe that real estate is a good investment, Mrs. Hamilton says. Recent statistics would seem to agree. In late July, the National Association of Home Builders in Washington, D.C., reported that the median price of a U.S. home has risen to $191,800 from $170,000 in 2003 and that conditions point to a "very strong" housing market through the end of the year.

If anything, flipping homes has made remodeling-to-sell more competitive. When he started 20 years ago, David Kline, a real-estate appraiser in Colorado Springs, Colo., says he could expect a 20% profit on his total investment in every deal; now he has to settle for about 10%. Sylvia Hurst, a Realtor with Century 21 John T. Ferreira & Son in Fernandina Beach, Fla., where people also fix up old Victorians, say she now regularly gets two offers on old pre-fixed up houses. The National Association of Realtors, also in Washington, D.C., keeps no statistics on flipping houses, but a spokesman notes that among 45,000 home sellers surveyed recently, 7% say they sold houses after owning them for a year or less.

Finding the 'Orphan'

The Hamiltons were both schoolteachers when they renovated their first fixer-upper -- a two-bedroom brick duplex in Chicago. They've since bought, rehabbed and sold properties in Illinois and near their present home in St. Michael's, on the east shore of Maryland, by following a simple formula: "Look for the worst house in a good neighborhood with good schools -- the orphan on the block," says Mrs. Hamilton.



The Hamiltons advise buyers to begin by targeting desirable neighborhoods, then scouring real-estate multiple-listing sheets for potential orphans there -- houses crying for cosmetic changes, like decorating and new landscaping, but without red flags like standing water in the yard or, worse, in the basement. Before touring these fixer-uppers, prepare "property profiles" for each room so you can note items like slow-flushing toilets and whether the heating and air-conditioning systems need replacing.

But don't just look at fixer-uppers, says Mrs. Hamilton. Attend Sunday afternoon real-estate open houses in your targeted neighborhoods to inspect the best-looking houses and learn their sales prices. Then calculate how much you'd have to spend to bring your chosen orphan up to their standards and no further. One mistake of first-timers is improving a house beyond the value of its neighborhood, she says. If the best houses don't have gold faucets or Corian countertops, you don't need them either.

Strictly a Numbers Game

Flipping houses, says Mr. Hamilton, is a numbers game. Your orphan must have a low enough purchase price so that you can cover all the improvements you've planned -- assuming that everything costs twice as much and takes twice as long, of course -- and still sell it at a profit. Scott Sinar, a Chicago attorney, says he and his developer partner have sometimes doubled or even tripled their cash investments when buying, fixing up and selling residential real estate. "We're always looking for projects," Mr. Sinar says, "but we complete only a fraction of the deals we consider. We dismiss most of them immediately because the margins aren't there."


Web sites likewww.houseandhome.msn.com can tell you the average cost and payback of most remodeling projects. A minor kitchen remodeling, for example, will cost $2,000 to $8,500 but may return 94% to 102% when you sell the house. Www.b4ubuild.comlists reference books to help you estimate the cost of home-construction repairs.

Fast turnarounds are the goal of rehabbers like Mr. Kline, 60, who has fixed up and sold about 50 houses. "I buy distressed properties [where] either the house needs a lot of work or the situation's distressed, like a divorce," he says. For each house, he invests less than $10,000 on average on basics such as a paint job, new light fixtures, new bathroom fixtures and kitchen cabinets when necessary, and sells them within 90 days.

Mr. Kline recently paid $90,000 for a "nasty" three-bedroom, one-bath house whose previous owner had rented to untidy tenants who kept dogs in the garage. He paid workers $9,000 to make basic repairs, haul trash and do yard work, and he expects to sell it soon for about $110,000.

Hard-Learned Lessons

Doing projects yourself when you'd be better served by hiring a professional is a common mistake, says Mr. Hamilton. He once rented a floor sander "and within 10 seconds put a gouge in a floor we could never get out. We learned to always hire someone to sand the floors, then we apply the finish." When flipping houses, you also must weigh holding costs -- the monthly mortgage, taxes, insurance and utility bills -- against the cost of hiring workers to finish each job quickly.

Other lessons from seasoned house flippers:

Inspections are important. "A workman noticed that the floor of an old bungalow I'd just purchased wasn't level in one corner," Mr. Kline says. "It turned out the foundation was cracked and I had to spend $5,000 for a company to shore it up. What's worse, I had to divulge the defect to potential buyers." The Hamiltons suggest hiring a home inspector to tour a fixer upper with you before you make an offer.

Be patient during the repair stage. "People in the construction trades don't show up when they're scheduled or even return phone calls. It can get very frustrating," Mr. Sinar says.

Be aware of the tax ramifications. Wayne Braverman, a real-estate attorney with offices in Chicago and Elmhurst, says that federal income-tax exemptions for capital gains -- a single homeowner is exempt from the first $250,000 gain when selling a house, a couple, $500,000 -- go into effect only if you've lived in a house for two of the previous five years. If you plan to flip houses faster, talk to a certified public accountant.


Build in flexibility. If you're doing this as a couple, make sure you have different skills and that at least one of you has a flexible work schedule and can be present to let in the workers, advises Mrs. Steinkellner. Redo one room of your existing home together before buying a fixer upper to see if your skills and habits are compatible.

And most important, she says, "You must be willing to get very dirty and get calluses on your hands. If you can't get satisfaction by looking at a wall that's perfectly flat, and take pride in your own work, don't do this."

--Ms. Bennett is a free-lance journalist based in Northbrook, Ill.




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