money.cnn.com/2005/03/14/magazine/flippers_0504/index.htm
NEW YORK (MONEY Magazine) - In the 1990s, Flippers were stock jockeys who finagled their way into initial public offerings, only to flip them day s or hours later for big profits. In hot spots like Las V egas and Florida, real estate flippers have discovered that a modest dow n payment and a little patience can net them tens (even hundreds) of tho usands of dollars in profits, sometimes tax-free. The most aggressive of them figure that some combo of paint, new flooring and kitchen upgrades can turn the dumpy house they bought for $300,000 in February into a $400,000 property they can unload in July. And in the most sizzling markets, they're absolutely right. Ask Angel Cooley, 54, a retired judge who moved to Las Vegas three years ago and has since flipped eight houses. Even with the Vegas market cooli ng somewhat in recent months, Cooley expects her real-estate-related net worth to reach seven figures this year. "A year ago you could buy something in Vegas for $200,000, and in less th an four months you could gain $150,000," she marvels. "It was a crazy ki nd of hysteria here, like people running after a Brink's truck." While quick-hit real estate investing is noth ing new, the confluence of new tax breaks, low interest rates and explod ing prices has created a perfect storm for flipping opportunities (at le ast in some markets) and has made legions of instant moguls. In Las Vegas, 7 percent of all homes sold last year had been owned for less than six months, ac cording to DataQuick Information Systems. Nationally, 14 percent of all new mortgages these days are for second homes or investment properties, up from 8 percent in 1999, reports mortgage tracker Loan Performance. If you've been considering putting in your application for that real esta te mogul position, statistics like these should give you pause. So shoul d the example of veteran flippers like Jeff Bliven, who, after 20-plus y ears in the game, says he's dropping out. "With some of these mortgage companies, if you can fog in a mirror they'l l make you a loan," says the 42-year-old resident of Newtown, Conn. That's what concerns David Berson, the chief economist at Fannie Mae He's still bullish on home prices but wo rries that speculators may overinflate white-hot markets. Historically, home prices have declined very infrequently in the US, in part because typical homeowners don't treat their houses like stock inv estments. They don't sell in a panic just because their neighbor fetched only 90 percent of his asking price. "But the nature of speculators," Berson notes, "is that they do pull out when prices stop going up." Vegas or Miami or San Diego rea l estate surely won't lose all of its value like an eToys, but the poten tial risks for investors are just as dire. A flipper who puts down $40,000 to buy a $400,000 home would lose the ent ire down payment should the market decline just 10 percent; throw in clo sing costs, 12 months of mortgage payments and a 6 percent realtor commi ssion to sell, and the flipper could easily be out $80,000 on a $40,000 investment. If the market chills, y ou'll face the ignominy of making monthly mortgage payments on a propert y you can only sell at a loss. That said, the risks are mitigated when y ou live in your investment for at least two years. Not only are the pote ntial tax benefits terrific, but your mortgage payments cover an all-imp ortant cost of living: shelter. MONEY sounded out two dozen experi enced renovators and real estate investors around the country for sugges tions. Flippers who do put down roots -- perhaps they're more aptly described as serial renovators than as flippers -- typically buy unattractive or und erappreciated houses in good or up-and-coming areas. They live there whi le making key renovations and then sell after two years, all the while l ooking for their next two-year home improvement project. Under current tax law, the first $250,000 of profit f rom a home sale is tax-free if the seller has lived in the house for at least two years. The tax break is even bigger for married couples: The f irst $500,000 in capital gains is tax-exempt. "For the typical American, it's the best and most generous tax break in t he entire tax code," says Douglas Duncan, chief economist for the Mortga ge Bankers Association. Turning a profit may seem easy in a flippers' market, but getting from po int A to point B can be a lot of work, particularly if the brand of inve sting you're used to is of the point-and-click variety. Scouting out pro perties, negotiating financing and final prices, and overseeing renovati ons can be a full-time job. In fact, real estate is as much a lifestyle choice as it is an investment strategy. Serial renovators Bob and Christine Miller of Phoenix, for instance, spen d most of their free time working on their homes, doing everything from repainting walls to rummaging through junkyards for vintage doors and si nks. For 44-year-old Chris, home improvement is in the blood: Her dad wa s a weekend tool-belt warrior. But Bob, a 41-year-old baseball executive with the Arizona Diamondbacks, didn't know Bob Vila from Bob Uecker bef ore he met Chris. Soon enough, though, he was tiling floors and installing cabinets like a pro. He says that fixing up a neighborhood eyesore is almost as rewardin g as turning a big profit. Even a world-class do-it-yourselfer with a keen eye for design can't turn a bad house in a bad school district (or a good house purchased for too much) into a winning flip. That's why most flippers focus their searche s on ugly ducklings that can be turned into swans with a few cosmetic ch anges. Her rehabs typically cost about $10,000 per house and are what she calls "cosmetic light," meaning carpets, roofs, paint and landscaping. For the math to work, she must buy 30 to 40 percent below a home's post-rehab market value. Bone takes a Peter Lynch-ian, buy-what-you-know approach. "If it's on the way to Costco, I've checked it ou t" Before bidding, she runs through a mental checklist: "Do the neighbors ha ve pride of ownership? The thing is, not every neighborhood has a "Boo" Radley house in dire nee d of a makeover. And if you're looking for bargains, real estate agents aren't likely to be much help because their job is to get top dollar for sellers, not steals for buyers. Bone, like many flippers, looks to the foreclosure and pre-foreclosure ma rket to find motivated sellers willing to cut a deal. Locating these fol ks isn't easy (Bone goes so far as to post "We Buy Houses" fliers at the county courthouse), but the Internet does help.
RealtyTra ccom for leads to investors looking for off-price real estate. Celestino Mastrangelo, 42, of Willoughby Hills, Ohio, has been investing in real estate for a decade. After making only cosmetic repairs, he and brother-in-law Dino Scalzo put the house b ack on the market, only to have it go unsold for months. Di ngy kitchen cabinets and a prehistoric furnace turned off buyers. "With our second house," he says, "we did everything: new kitchen cabinet s, new furnace, hot-water tank, and we finished the basement." After put ting $25,000 into the $80,000 house, they soon sold it for $155,000. If you're selling on e house to buy another, you'll probably need a bridge loan. For hard-cor e flippers hunting for quick scores, traditional mortgages may not do th e trick. The best bargains come from people who need cash and are in a hurry to se ll. That's why many flippers finance purchases either with personal savi ngs or home-equity loans. Says Mastrangelo, "Sellers are motivated to sell to you when you don't ha ve to qualify for a loan." The tricks of wise flippers can be applied to your home, even if you've n o plans to sell. When they buy, they look for places that are underprice d because of cosmetic problems that most house hunters don't realize can be easily fixed. When they renovate, they choose styles, patterns and fixtures with broad appeal: no purple kitchens, no heart-shaped Jacuzzis. Installing an ultr a-efficient furnace or carving out an attic bedroom is nice but unlikely to enhance a home's curb appeal. That's why the most fruitful fixes are the most vis...
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