This Is Why You Might Not Want To Start Flipping Houses
This story is a bit different than most of my previous ones. In other stories I talk about the benefits of investing in real estate and following the BRRRR Strategy (buy, renovate, rent, refinance, repeat). Instead of promoting the benefits of flipping homes, I wanted to share a cautionary tale that shows that flipping houses isn’t for everyone — or at a minimum, if you want to flip houses you need to educate yourself properly before beginning.
I recently went to view a property in my area that had been “flipped” by someone who thought they would be able to make some easy money by flipping a small house in town. Unfortunately for them, the flip didn’t go well. It was clear when viewing the property that they didn’t have a plan as they started the flip, and they hadn’t done enough research prior to buying the property.
In order to save others from making a similar mistake, I will list out the big red flags I saw during the 15 minute viewing. I hope that this will be an eye opener for anyone thinking of starting a real estate flipping business.
Flag #1 Location
In real estate there is a saying “Location, Location, Location”. The location of a property has a huge impact on it’s value. While I don’t personally think there are any locations that are “un-investable” it is important to note that some locations will never be able to demand a premium price. When looking at a property you need to be careful not to try and over improve for the area. This house was situated on a very small lot in an alleyway. While there is nothing wrong with alleyway homes, this was the only home in the alleyway; the rest of the properties only had sheds or garages. Without any residential neighbours, the small house was in a poor location, and until other garages were converted to alleyway homes, it would continue to be off-putting to most buyers.
Flag #2 House Size
There’s nothing wrong with small homes, but the size of a home and the layout of the home need to align. This house was a converted single car garage, and had a total of around 700 square feet of livable space — part of which had an angled ceiling. The flipper had taken this space and created three bedrooms, a bathroom, a kitchen, and a living room. At 700 square feet it is hard to support two bedrooms, but adding in a third bedroom made each room very small, and almost unusable. The size of all three rooms would allow for maybe a twin bed and a night stand. The flipper also created a small awkward kitchen that couldn’t fit a regular size stove or fridge and laundry hookups took up a large space in the living room area.
Flag #3 Partly Finished Basement
The original structure had a basement, and it was obvious that the basement presented a lot of issues for the flipper. When we viewed the property there was significant moisture in the basement, and there were visible water puddles on the floor. The flipper had tried to finish off the basement, but clearly gave up. The walls had new studs, and insulation against them. The insulation was trapping moisture against the walls, and it was clear that mold was starting to spread through it. The flipper skipped the step of waterproofing the basement, and by beginning to finish it without waterproofing, they had actually created a health hazard. Waterproofing the basement would be very costly, but if the flipper had simply added ventilation and left the walls bare, the basement might have been useful for storage.
Flag #4 The Roof
The flipper put on a new roof, which isn’t cheap. To add onto that, they put on a new metal roof which is the most expensive type of roof they could have chosen. While this is something they would have had to of done to flip the property, it was clear that it wasn’t well thought out. The roofline of the home led to the kitchen having an angled ceiling that didn’t allow for a fridge or stove. While this was partly the fault of a poor kitchen layout choice, if this was the layout chosen, and they were putting in a new roof, the cost of changing the roofline slightly to allow for another few feet of headspace for a stove and fridge would have gone a long way. On top of this, all the water from the roof was directed to the highest point of the property and drained towards the house. The person who installed the roof gutters led the rainwater to a point that would cause it to drain into the basement. While changing the downspout location wouldn’t have solved the basement moisture issues, it would have gone a long way to minimize the amount of water leaking into the basement.
Flag #5 The Windows
The house had a 50/50 mix of old garage windows and new windows. Flippers know that new windows usually don’t provide a return, but in this case, they would have. When you invest in new floors, new walls, and a new kitchen, you can’t have old broken windows though out the house. The new windows that were installed were also way too small for the rooms, and were at a very awkward chest level height. You actually had to bend over to look out the windows.
Wrapping Up
It was clear that the flipper of the house didn’t have any experience in flipping homes. They over invested in areas that didn’t make sense, and they underinvested in others. They clearly spent a fortune on the renovations, but the result was an awkward small house in a poor location with water and mold issues. Looking at the amount they purchased the property for, the amount the roof and other renovations would have costed, and the listing price, I am almost certain they would have lost money — even if it sells for the listing price which is unlikely.
So what’s the moral of this story? Flipping houses isn’t guaranteed to make you money. If you don’t know what you are doing, it can cause you to lose a lot of money. If you want to begin flipping homes I would suggest that you partner with someone that has experience, or volunteer to work for someone who flips homes full time.
This article is for informational purposes only; it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
