Flipping vs Fixing vs Investing

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I get occasional questions about the difference between these three kinds of activity. Well, there are subjective parts to the answer, but here are some general guidelines:

A true flipper is looking for a quick turn on the property, usually without much work done to really improve the property. They don't typically keep the property and rent it; they're not willing to accept the work of being a landlord. They make their money off of desperate sellers and getting a very low price for a property. Typically, their profit comes from how far down they can drive a desperate seller.

A fixer is someone who is looking to make a profit by making the property more attractive. By making it more attractive, they are able to sell for more money. They are willing to do more than just cosmetic things, but they still typically sell when the renovations are done, although many will wait for a full year to gain better tax treatment. They do not typically rent the property out, although they may live in it while it's being renovated.

An investor has the idea of buying and holding for a certain period of time, usually leveraging rent to make the payments, sometimes breaking even, preferably with positive cash flow, usually while eventually hoping to cash in on capital appreciation, but always holding for periods that start at two years and go up from there.

Now I've heard a lot of folks who are really fixers call themselves flippers, but I've never heard a flipper call themselves a fixer. Why? Because the general perception admires flippers more, because they theoretically make money by their wits instead of by the sweat of their brows. It's more status to call yourself a flipper, although why people think it's better to tell people they make their living by shorting people who really have no choice, instead of by actually creating value by improving the properties they purchase, is beyond me. I don't look down on flippers in any way. That seller had a reason they thought it was a deal worth taking; nobody held a gun to their head. I do have more admiration for fixers and investors - which are more difficult. But due to the huge long swell of the seller's market that concluded recently, many people got addicted to the fact that it enabled people who didn't really know what they were doing to buy properties for too much money, and six months later sell for a profit despite not having done anything to improve the property.

Right now, the local market does not support flipping, due to the fact that no matter how good the bargain they buy the property for is, as soon as the flippers go to sell it and actually make a profit, they become one of the thirty-odd sellers for every buyer out there right now. Indeed, I know of a couple of properties out there on the market that have been through more than one sale from desperate flipper to optimistic flipper, and then the optimistic flipper gets desperate and sells to another optimist. Indeed, with most properties on the market, it's a gamble as to whether fixing will yield a profit after expenses in the usual fixer's time frame. There are quite a few out there that are suitable, and many more that are not. With the ratio of 30 buyers to every seller this last week, the odds are against it in all but a very few properties.

Investors who buy now will do very well. There are a lot of desperate sellers out there, and so long as they've got positive cash flow in a sustainable situation, all they've got to do is wait for the market to move in their favor. Until then, they are making money. Real investors never turn into desperate sellers, because they always have the option of hanging on to it. It might not be their original plan or their most preferred option, but it is there.

I love working with fixers. It's a lot more work to find suitable properties right now, but that's fine. And, of course, families who buy for a personal residence in the current market will do very well in the long term. But flippers are basically wasting their time. The market isn't there to make them happy, and I can't say as that causes me any grief.

Caveat Emptor

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This page contains a single entry by Dan Melson published on March 8, 2008 7:00 AM.

Why All The Fuss Over Real Estate Transactions? was the previous entry in this blog.

What Do I Really Need To Know To Buy a House and Get A Loan? is the next entry in this blog.

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