House-flipping hit its highest levels last year since before the recession, and remains strong in Charlotte, as investors seek to capitalize on rising home prices and a seller’s market with tight inventory.
But the process is nothing like what you see on TV, where it looks like a home can be bought, gutted, renovated and resold in less than an hour – not including commercial breaks. The truth is often much messier, real estate professionals in Charlotte said.
“It’s a lot easier to lose money in this business than it is to make it,” said Jeff Johnson, owner of NewPath Properties, which specializes in buying and rehabbing distressed properties.
Still, that’s not deterring people from giving it a try in Charlotte. First-quarter figures from Attom Data Solutions show flips – defined as the same property selling twice in a 12-month period – made up more than 6 percent of sales in the Charlotte region, or 540 sales. House-flipping increased almost 4 percent from a year ago, though it remains well below the city’s peak flipping period in 2004.
That’s consistent with the national market, where flips accounted for 6.7 percent of sales in the first quarter, said Daren Blomquist, senior vice president at Attom. Although it still hasn’t returned to its pre-recession peak, house-flipping in 2016 was at its highest level since 2006, powered by surging home prices and investors looking for a quick payoff.
“There’s a lot of capital” chasing returns from house-flipping, said Blomquist.
With properties selling fast, it can be tempting to buy a fixer-upper, slap on some new paint, replace the appliances and put it on the market. Home prices in Charlotte jumped almost 10 percent in July compared to the same month a year ago, as low supply and steady demand pushed the region’s median sale price to $236,000.
But Charlotte real estate professionals said they’re seeing increased competition to buy houses. The foreclosure sales that were rife just a few years ago are fewer and farther between now. Out-of-state companies that pay cash for houses to rent out often swoop in and buy starter homes. And with the construction market in overdrive, contractors are tied up building the thousands of new apartments, hotel rooms and office towers dotting the city’s skyline – making it hard to find labor.
“You’ve got contractors that quit, you’ve got contractors that don’t show up,” said Josh Fannin, owner of Providence Management. He’s been flipping houses for more than a decade, largely in markets just outside Charlotte like Belmont and Gastonia. “Unless you’re doing the work yourself, you’ve got to rely on another person.”
Throw in the natural unpredictability of renovating decades-old houses – the cost of permits, bringing a house full of wiring up to modern building codes, attorney’s fees, a survey – and what looks like a quick $25,000 profit can quickly evaporate.
“Those are the hidden costs that add up,” said Kim Trouten, a partner and Realtor with the Bovender Team/Allen Tate Realtors who has rehabbed and resold more than a dozen houses with her husband. “You can actually lose money. You’d better know what you’re doing.”
If you’re thinking about getting in the game, here are five key considerations professional flippers say you should keep in mind:
1. Plan for the unexpected
“What they show on TV makes it look so simple and easy,” said Fannin, who flips about 30 houses a year.
But anything can happen when you start tearing up walls and rooting through older houses. On a recent deal where he was projecting up to a $30,000 net return in four months, Fannin said he ran into an unexpected problem and had to replace flooring throughout the house.
“Cost me 25 grand,” Fannin said. “My subs made more than I did the entire project.”
Fannin took a $2,000 profit for months of work and moved on. But for someone doing just one or two flips a year, that outcome might be near catastrophic.
A buyer recently had a problem with the roof on a house Johnson sold more than a year ago. He said he’ll go back to fix it for free, but that’s the kind of curveball that can eat up profits.
“People don’t expect stuff like that,” said Johnson, who’s flipped about 120 houses since starting his company in 2009.
2. Know what buyers expect – and be prepared to spend on it
Energy-efficient windows and insulation. Open floor plans. Big windows, lots of natural light, plenty of closet space. Indoor-outdoor spaces to entertain, high-end gas cooking ranges and rainfall shower heads. Trouten said having a good sense of what buyers want is essential to successfully rehabbing and reselling a house.
And while those items cost more than a coat of new paint and a tile backsplash, Trouten warned that skimping on any of them can hurt the resale price by signaling to buyers that the renovation was done on the cheap.
At a house off Carmel Road she and her husband are renovating for sale this fall, Trouten pointed out the new windows and skylights to bring in natural light and talked about her plans for using custom fixtures in the kitchen.
Details matter, Trouten said: “If it’s a cheap faucet, they automatically go ‘What’s behind the walls that’s cheap?’ ”
3. Don’t overpay upfront
“You’re going to make your money on the purchase of the house, not the sale,” said Fannin. Translation: If you pay too much, you likely won’t make it back after spending tens of thousands more to renovate and market the house.
For example, if you pay $250,000 for an old house that needs a major rehab in a neighborhood where newer houses are selling for $300,000, you might only be able to resell the house for $300,000 after your renovation, wiping out potential profits.
Still, avoiding overpaying can be tough in a market where prices are shooting up and it’s tempting to buy something, anything, before they jump higher.
“I’m having a harder time finding properties,” said Johnson. “Prices are out of the realm of reality. People are willing to overpay.”
4. Be realistic about how much time it will take
There’s an expectation among many “weekend warriors” that house-flipping is a simple side hustle that you can do in a few hours a week, Fannin said. That’s not the case, he and the other flippers warned.
“It’s no joke, rehabbing a house,” said Johnson. “It’s a hassle.”
Trouten agreed. Her husband manages the construction, while she does the interior design for their houses.
“It’s a full-time job,” she said.
5. Be prepared for busy contractors
With all the construction going on in Charlotte, from residential to offices to apartments, contractors are busy – and getting on their calendar can be a challenge if you don’t already have contacts.
“New people have a really hard time finding contractors,” said Johnson. “It’s taken me years to get together the contractors I have...The good ones don’t have any room in their schedules.”
Trouten said finding skilled tradespeople such as electricians who have availability is especially tough right now. Many are booked up with established clients.
“These qualified and skilled contractors are choosing to work for people who will give them repeat business,” said Trouten. “That is going to be a challenge. To get someone to show up for a job right now is almost impossible.”