HGTV and other popular cable channels are flush with home renovation “reality” shows. They make it look both fun and easy to buy, fix up and quickly resell a home for big profits.
While entertaining, the shows are obviously scripted for high viewership and ratings. Here are a few important things the shows omit or just get wrong.
1. Real Estate Transactions Actually Take a Lot of Time
The shows make everything seem to happen fast. They even make it look like buying a property takes almost no time at all.
Real estate transactions take at least 30 days to go from making an offer to getting the house keys. More often, it takes 60 days or more.
There are a lot of steps: inspection, title search, appraisal, acquiring HOA resale documents, mortgage loan processing and approval, and closing document preparation. And a different professional handles each step. The coordination of everything takes time. Missing or rushing something can be catastrophic. With such a large financial transaction, do you really want to rush and miss something that could cost you thousands of dollars later?
2. Property Renovations Actually Take Careful, Attentive Coordination
On the shows, the hosts will buy a home at auction and have their contractors on-site doing work that afternoon.
In real life, you need to do a lot of planning before actually starting the rehab. You create a thorough “scope of work.” This details everything that needs to get done. Then you take bids from different contractors and trades. And you must develop and manage a schedule of work, submit permits, get inspections and much more.
In reality, rehabs rarely happen quickly. Timely completion takes a detailed plan. You’ll need an experienced project manager to oversee the project and a team of licensed tradesmen who are efficient, talented, committed and available. Quick rehabs are possible but only when they are actively managed to run like fine-tuned machines after being planned out in great detail.
3. It’s Not So Easy to Find and Purchase Properties Where the Numbers Work
This is the one that makes me cringe the most when I watch these shows. The DIY couple quickly finds three suitable rehab candidate homes and chooses the one they want to flip. The truth is, there’s never an abundance of homes to rehab at the right price.
It takes lots of research to find good rehab candidates. Property listings are incomplete, and sometimes the listing photos look nothing like the actual property! You’ll visited a lot of properties that you won’t be interested in buying. You’ll make offers that won’t get accepted. You’ll need to learn how to crunch the numbers to evaluate properties. There are a lot of hurdles and challenges in the process. The pictures you take may not show the true property condition. And many deals will fall through.
And to find a prince, you have to kiss a lot of toads! Typically, I’ll look at three dozen listings, physically inspect eight to 10 properties and make three offers before I get to the closing table and acquire a property where I’m confident with the numbers and the risk inherent in the deal.
4. You Need Capital
Isn’t it amazing how unconcerned the TV hosts are about tens of thousands of dollars when making offers and talking with contractors and buyers? It’s like Monopoly money.
When you’re flipping homes — especially when you’re starting out — you need capital, whether it’s your own cash or an alternative source of liquid funds. Perhaps you could even use your IRA to buy the house. But traditional banks are in the business of loaning money on homes that are immediately habitable. That doesn’t include the distressed property you’re renovating.
You need cash for the initial purchase, closing costs and renovations. You’ll also need money for the holding costs. These include the taxes, HOA fees, insurance and utilities you’ll need to pay until the property is sold. How much cash depends on your location and other factors.
A house in foreclosure might cost $80,000. And then you’ll have perhaps $5,000 in closing costs and $40,000 in renovations. And you could need as much as $6,000 in holding costs between purchase and resale. In this example, you will need to spend over $130,000 in cash before you get to the closing table.
5. You Can’t Just Knock Down
First, the demolition work itself is not nearly as easy as Chip Gaines makes it look!
And there are important considerations. You can never be entirely sure what’s behind old walls. This is especially true in foreclosures and other homes that haven’t been well maintained. Moving a wall may mean moving air-conditioning ductwork, electrical outlets and plumbing. All of this work will increase your spending and delay your timetable. And you need to be sure you’re not moving a weight-bearing wall that would compromise the home’s structure.
Plus, you need to know exactly what you’ll shake loose in the rehab process. You could create a major health hazard for yourself, your crew and the future owner if you end up knocking loose things like lead paint and asbestos insulation, which are commonly found in older homes.
6. You Can’t Spend Money Willy-Nilly on Improvements
I actually laughed out loud at one show when the host turned up the day the rehabbed home was to go on the market and demanded that the entire exterior be repainted because the paint shade was not the exact color she had chosen. The team repainted the entire house a slightly lighter color! Come on — really?
That would cost thousands of dollars while delaying the sale and negatively impacting cash flow. And to what end? The difference was so slight that no buyer would have noticed. And there was no increase in value to offset the cost.
In the real world of flipping houses, you carefully estimate and diligently manage costs to stay within budget. You’ve done careful research and due diligence to know what to change, how to change it and how much return you’ll get for each change you make. In essence, you need to clearly understand the difference between investing too much and not doing enough.
You will need to have a small budget to deal with unexpected issues that need to be remedied. But you don’t spend money on improvements that don’t immediately increase the resale value of the home. Period.
7. You’re Not Going to Sell Quickly and Get Top Dollar
Who are these buyers who show up as soon as the renovated house goes on the market and pay top dollar without negotiating the sale price? You guessed it… they’ve been fabricated for your viewing pleasure.
In real transactions, you need to strategically set a listing price that helps you sell your renovated home quickly. Time literally is money here. The longer a home is on the market, the less desirable it becomes, and the less it’ll eventually sell for.
Local markets have an average number of days on market, the time it takes for a house to sell. That time varies based on location, condition, competition, market conditions and more. It might be 20 days in a hot market or 65 days in not-so-hot neighborhood. You must price your rehabbed home at the right price to get a quick sale. And that means you’re not going to price it at the top of the market.
As mentioned, you must keep paying the holding costs until the home is sold. Insurance, taxes, HOA fees and utilities accrue each month. At minimum, it’ll take two months to go from the open house to the closing table. And this is assuming you immediately get an offer you accept. More likely, you’re looking at four or five months of paying holding costs.
You’ll wipe out your profits quickly if you end up holding the property too long and discounting the price because the perceived value has gone down while it stalled on the market. You must price it for a quick sale in the beginning of the process.
Buyers may love what you’ve done with the renovation. That is, provided you did your local research and know what buyers are looking for. But there are almost always things that the buyer or their inspector will find that require financial concessions from you, the seller. Additionally, in some markets, the seller will pay part of the buyer’s closing costs for the deal to work, according to standard practice.
It Sure Is Not Real Life
Many of my colleagues wish these shows would just go away. They say the content misleads and misinforms the gullible, yet well-meaning newbie. I watch them now and then; they’re interesting and entertaining. But I rarely find anything that translates well into the real world of investing in real estate.
What do you think?