House flips: Floodgates open again?
The number of investors in America who flipped a house in the first nine months of 2016 reached the highest level since 2007, the Wall Street Journal recently reported, noting, “About a third of the deals in the third quarter were financed with debt, a percentage not seen in eight years.” Is flipping making a comeback locally? For a perspective about Central Florida’s real-estate market, the Orlando Sentinel Editorial Board sought out Joshua A. Harris, the director of the Dr. P. Phillips Institute for Research and Education in Real Estate at the University of Central Florida College of Business. The full transcript can be found at OrlandoSentinel.com/Opinion
How much house flipping is going on throughout Central Florida? This is hard to measure, but I would say a lot, at least compared to other cities. I’ve seen stats from RealtyTrac that suggest Orlando is one of the best, and even most profitable, cities in the United States to flip houses. I know many investors actively doing deals. If you go into some neighborhoods like Audubon Park, College Park or Winter Pines (Winter Park) — just to name a few — you will see a lot of buy-, fix- and sell-type deals. All it takes is a neighborhood with older, yet-to-be updated homes within the city, and flippers are bound to be active.
Who is involved — local individuals, investors from outside the area or even outside the country, hedge funds or other institutions? I have only personally witnessed or been aware of locals, or at least those based within the state, doing true buy-, fix- and resell-style flips in Orlando. The hedge funds, institutions, foreign buyers, etc., all tend to focus on rental property they will hold long term. They may do some “fix up” before renting, but it’s not fair to call that flipping. In general, successful flippers must be really good at construction management, and that normally requires being close to the property on a daily basis.
How does what’s going on now compare with what went on before the housing market collapsed in 2007-2008? I see very few comparisons; the housing market is incredibly short-supplied right now as new construction remains relatively low. Plus, prices are far more reasonable compared to average incomes in the metro area. The fact is that banks are not lending anywhere close to as stupidly they did back before 2008. Buyers must show they have the income to repay the loan and prove they have the down payment — something that was not required back then. Plus, many areas of Central Florida have run out of vacant land, meaning development has shifted to Osceola, Polk, Lake and other surrounding counties; this opens up the core of Orlando to flippers, as they are effectively the only ones providing something that looks new.
How risky an endeavor is house flipping today — how easy or hard is it to make money? It’s a lot harder than it looks, and TV shows with names like “Flip This,” “Flip That” or whatever do a great disservice in showing the real risks involved. The best flippers — those who survive year in and year out — are generally good at construction and handy work. Even if they hire contractors to do all the work, they are much better at negotiating, controlling costs and managing the construction if they understand it and can even step in and do some of it themselves. Plus, they know how to spot hidden risks and problems and accurately estimate costs before buying. So, it’s doable, if you know what you are doing, but I really do not recommend it as a hobby.