There is only one show currently on television that shows the redevelopment world in anything remotely resembling a realistic light: First Time Flippers. And I can’t watch that show because it just seems cruel to let folks make the mistakes they do. Worse it is just wrong to inflict those mistakes on their future buyers.
The rest of the shows present a remarkably rosy picture of the process. So, I decided to compile a list of the most egregious misconceptions these shows propagate.
- All you have to do is buy a house off the MLS.
You see this on Flip or Flop all the time. They rush to buy a house that “just came on the market” or that a “Realtor® friend just told me about.” We even buy the occasional house from a Realtor’s MLS listing.
While it is true that more than 80% of the houses sold in the US are sold via the MLS, that’s only part of the story. When you’re looking for a house to redevelop, you’re not looking for just any house. You need one that you can buy cheap enough that you can afford to hold it through the development, spend the money you need to fix it up, and still make money when you sell it.
The MLS is primarily for retail buyers. As a redeveloper, you can’t pay retail and survive. That’s why I know several people who spend more than $10,000 each month on marketing. You don’t have to spend that much unless you want to operate on a volume, but you will have to spend something.
That said, you almost always want to list your finished home for sale or rent on the MLS for exactly the same reasons you won’t buy listed homes very often. The MLS is for retail buyers, which is exactly who you want to buy your finished project. The only time you wouldn’t want to list the finished project is when you have a purchase offer before you finish.
- Your contractor knows what the renovation should cost.
You’ll see a lot of TV show hosts walking the property with their contractors and expecting the contractor to put together the cost right then and there. This approach is a recipe for disaster. It’s your job as the redeveloper to put together a statement (scope) of work and remove any ambiguity from the bid process. You’ll pay double for ambiguity.
Contractors can make pretty good guesses about what it will cost to do what you tell them to, but they’re not that adept at saying what should be done. And a lot of them are pretty literal. If you tell them to replace the tub, surround, cabinets, and countertops, they won’t necessarily say, “What about the mirrors?” I have never found one that will say, “Do you want towel racks and a toilet paper roller?” Most will treat anything you don’t specify as a change order and charge more for it when you complain they “left it out.” No, you did.
And that’s the honest contractors. Let’s just say, never go with the lowest bid. It will probably cost way more in the long run.
- You’ll encounter problems, but they’ll be easily surmountable.
Part of the formulaic “drama” on just about all of the “flipping” shows is the “unexpected setback.” It usually happens just before the second commercial break, and they resolve it in the third or fourth segment.
This hiccup is one of the most honest part of these shows. You’ll encounter problems on every project. They’ll range from the inconveniences shown on many shows, to moderately expensive problems like not getting the Homeowner Association to approve your color choices, to major setbacks that can sink your project, if not your company. All you can do is pray you build up sufficient resources to recover before you encounter a catastrophe.
- Despite the unexpected problems and not paying attention to your budget, you’ll still make a lot of money.
This myth is perpetuated by confusing gross profit for net. Most of the shows at least include the renovation costs when they calculate the profit they tell you about. Unfortunately, most leave out many other expenses that nobody told you about before: things like, the cost of money, utilities during the renovation, closing costs at purchase and sale, and commissions. I’m going to assume permits actually are included in the renovation budget, even though I’ve never heard them mentioned.
Then there’s the tendency, especially on Flip or Flop, to add expensive upgrades at the last minute because “buyers will love it.” Buyers will love it, but they may not be willing to pay for it. Even if they are, the house may not appraise for the price you need to recoup your investment. You always want to improve a house just slightly above the neighborhood trends. A house in a working class neighborhood won’t support Italian marble countertops, even though I’m sure the potential buyers would really love them.
So how do they get away with it on TV? I see only two possibilities. Either the houses are in transitional neighborhoods (think gentrification) or they buyers are buying the name of the famous redeveloper. These are not mutually exclusive possibilities.
- Anyone can do it.
All of these myths put together have given many people the idea that anyone can do this. Well, anyone can do it, but not everyone can do it successfully. Anyone who says otherwise is trying to sell you something. Can you do it? I don’t know. I hope so.
Now given all these myths, why do we at Hermit Haus Redevelopment do this? I love making old, ugly houses into affordable homes people can be proud of living in, and I love helping people out of bad situations when I can. Honestly, I’ve gotten myself into a few bad situations pursuing this dream, but I’ve managed to survive even the ones that have cost me a lot of money, and I’ve learned from every mistake. There are plenty of ways to make money in this business with less risk than redeveloping houses. I’m not trying to dissuade you from the redevelopment game. I just want you to understand what you’re getting into. That’s why I promised to be as honest about our catastrophes as our big wins.
Now, I invite all y’all to add your favorite myths, wins, and lessons learned in the comments.