The Raleigh real estate market, in general, is NOT conducive to flipping houses for a quick profit.  Believe me, I’ve looked for these opportunities.  In general, they do not exist here.  At least not in a form for which the casual participant has the budget or the expertise.  This article is part 1 in a 3 part series on investing in Raleigh real estate.  Today, we’re going to talk about the challenges of flipping houses for a profit.

I get several phone calls each week from people who introduce themselves as investors.  The call usually goes something like this.  Caller: I’d like to find some houses to fix and flip.  If you can find them for me, I’ll buy them from you and then let you list them for sale.  Me: Great!  What’s your criteria?  Tell me what you’re looking for.  Caller:  Gee, you know.  Anything that I could paint and replace the carpet and make about a 20% return in 30 days or so.  Me:  What’s the 20% based on?  You’re talking about 20% return on your cash investment, right?  Caller:  I don’t think so.  I want 20% on the price I paid for the the property plus all my expenses.  Me:  I think we need to talk about the realities of investing.

Let’s look at a typical $200,000 fix and flip opportunity.  Carpet and paint inside and out could easily cost $15K, especially if you don’t do any of the work yourself.  Buying and selling expenses, and carrying charges for borrowed money, could be another $15K.  Remember, you have to pay expenses when you buy and when you sell.  So far you would have to buy a $200K home that needs carpet and paint for $170K just to break even. 

The typical caller I mentioned wants 20% on the price of the house and expenses.  Let’s assume that’s 20% of 200K.  That’s $40K in profit which now means the house must be purchased for $130K.  Where in the world are we going to find someone who will sell their home, which needs carpet and paint, for 35% less than it’s worth?

Okay.  Let’s say that the caller will settle for only $5K profit. That’s not much money for such a large risk, is it?  In this case we would still have to buy a $200K home that needs paint and carpet for $165K.  Great.  Now we only have to find someone who will sell such a house for 18% below it’s market value.

Are you starting to see the difficulty with finding a suitable house to flip?  No one in their right mind would sell their $200K home for $165K.  They don’t have to in our market.  Even if a seller were unwilling, or unable, to invest the $15K for carpet and paint to get full market value, he could drop the price only $20K and some buyer would come along and be very pleased with the bargain price.

Flipping does work for some in our market, but it involves much more than making cosmetic repairs.  Homes in Raleigh’s Inside the Beltline area are great candidates.  The North Hills, or Midtown, area is also fast becoming a great fix and flip market.  But the level of work involved typically goes way beyond cosmetic things like paint and carpet.  Complete gutting and remodeling can bring huge returns.  In many cases, builders will pay $400K for a house, tear it down, and build a custom dream home in it’s place. 

This is a very profitable business which takes considerable capital and expertise.  It’s not a weekend hobby for these guys.  It’s their full time job.  And even the experts make mistakes sometimes.  If it’s a remodel, you have to know exactly what’s involved and what the market will bear for a finished product.  With great reward comes great risk.

Check back tomorrow for part 2.  We’ll discuss foreclosure opportunities.  Then on Friday we’ll talk about a buy and hold strategy that can net some huge gains over time.  See you then!