The Payoffs and Risks of House Flipping

Published 02/20 2014 06:07AM

Updated 02/20 2014 06:12AM

SPRINGFIELD, Mo. -- House flipping. It's the gold rush of the 21st century. You buy a run-down house for cheap, spend a couple months and a few bucks to fix it up, and sell it for a huge profit. But is it that easy and even worth it?

    You see it all the time on TV, 'I bought the house for 625 thousand, and I'll sell for 799 thousand. That's 150 thousand made in three weeks.'  With profits like that, it's no wonder people are taking their cut at flipping houses.

    According to Realtytrac, in 2011, 73,000 homes were flipped in the US. The average time to flip was 100 days. Total profit was $15,000. In 2013, those numbers spiked. 156,000 homes were flipped. The time to flip dropped to 84 days, and profits went thru the roof, to $58,000.

    It looks and sounds like easy money. But "It's not the glamour that you see on TV," says Sean Schoonover.  His company buys old, run down homes in Springfield. "It was a house that nobody wanted," he says, "definitely one of the ugliest in area." He fixes them up, then either sells them or leases them. "We're making Springfield better, one house at a time," he adds.

    We toured one of their finished rehabs in central Springfield. "Originally," says Sean, "this was a four bedroom, two bath, but the hallway was only this wide."  He says finding the right property is key. Which is sometimes where investors step in.

    "It's awesome," says investor Paul Lipscom, "to be able to turn one of the ugliest houses in the neighborhood into one of the nicest, and improve the whole neighborhood and create a little more pride in that neighborhood."

    It's a lot of work to create that pride. Check out this house they recently bought. "Most people will run from this," admits Schoonover's partner, Chad Mellentine. "You walk into some places and say, wow, how could it be? But there's always a way to fix it."

    Fixing it can bring in huge profits. In some parts of the country, an average of $100,000 per flip. But experts say that is not the case in the Midwest. Here, Schoonover says, you can expect about a 15 percent profit. A decent payday, for a big risk.

    "You can get hurt really quick in this business," says Schoonover." For one, you have to worry about something they call the 'oops factor.' "I haven't had a house yet where we haven't run into something that we weren't expecting," admits Schoonover.

    Mellentine explains the 'oops factor' that popped up in another one of their properties. "Once they pulled the tile off," he says, "they were going to re-tile this and found out that the subfloor was bad. You kind of get used to something happening. We haven't had anything on this house yet, so for this to happen is kind of expected."

    Finally, once you get past the oops factors and finish a property, there are holding costs to worry about, taxes, utilities, maintenance, even vandalism. And then of course you have to find the right buyer. And all of a sudden, the TV version of house flipping is flipped.
    "It's not reality," says Mellentine, "they do that on tv to create drama, there's not a lot of drama in this."

    Not a lot of drama, but there could be a lot of money, especially on the coasts. Realtytrac says the average flip in Massachussetts last year brought a net profit of more than $100,000 dollars.

    But again, that's not in the Midwest where the homes aren't priced artificially high.   

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