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Should I Flip or Rent Homes?

New real estate investors often ask: “Should I flip or rent homes”? Here’s a straightforward answer. Rent instead of flip. Why? View our answer based on facts.

Flipping Homes in San Diego

The Myth of Fixing and Flipping Homes

 

It looks easy! Buy a run-down house cheaply, make a few cosmetic fixes, and list it for a nice profit.

It’s so easy and profitable that for the past forty years dozens of TV shows claimed: “Get Rich Quick by Buying, Fixing, and Flipping Houses”. The “Fix and Flip” hype promotes easy profits by flipping houses. In 2012, CNBC broadcasted 16 house flipping for fast-profit TV shows.

Some investors make a profit by fixing and flipping. Yet, as you will read below it takes good timing and a “dream team” of professionals to help you profit. Only a seasoned fix & flip real estate investor makes money. Otherwise, you can end up in a nightmare rather than a dream.

For example, check out this fix and flip house photos in a recent blog post by WeLease titled: “Tenant From Hell – Left Dead Cats, Feces, Obscene Graffiti” As the title suggests, the tenant vandalized the entire house and left dead cats and feces for the new owner to clean up.

 

How Zillow Offers Home Flipping Program Failed in 2021

 

The nation’s largest house flipping company recently tumbled. Zillow Offers describes itself as: “Zillow Offers buys and sells homes directly in dozens of markets across the country.”

On October 26, 2021, Bloomberg published a news story titled: “Zillow’s Zeal to Outbid for Homes Backfires in Flipping Fumble”.

Bloomberg summed it up with: “After buying more homes in the third quarter than it ever has before, the company is working through a backlog of houses that need fixing and sold.” Yikes!

Lesson to Learn: Don’t get carried away by outbidding other buyers for homes.

Tip: Want to learn about the right way to bid on homes? Our broker, Big Block Realty, recently published a blog post titled: “How To Win A California Home Bidding War”.

On the same day, the California News-Times ran a story describing the Zillow Offers program as a “Flipping Fumble”. Zillow stopped making offers to buy homes in September due to a backlog of unsold fixer homes. “Slowing price appreciation means it will sell many homes at a loss”.

A week before, The Orange County Register ran a similar news story, Zillow house flipping hits snag as the hot housing market cools. It claimed that Zillow listed a record number of houses for sale in September “at the lowest markups since 2018”. As a result, Zillow was forced to cut prices on half of their U.S. listings.

 

Why Zillow Failed in 2021?

 

Zillow’s Atlanta listings took a nosedive in prices. Likewise, 250 of their Phoenix listings cut their prices “at 6% less than what the company paid for the homes”. This became a “sell for less than what we bought” disaster. The OC Register claimed Zillow sold each house at an average $29,000 loss.

Bloomberg provides an example of a typical Zillow Offers buy, renovate, and flip for a loss. A Phoenix suburban three-bedroom/bath home listed for $390,000 and sold to Zillow for $412,000. Zillow made repairs and relisted the house for $387,000. Thus, Zillow lost $25,000 on the flip. That’s bad business.

 

The Problem with Zillow Offers

 

Back in 2019, our broker published a post titled: “Zillow Offers 2019 Review”. It points out a flaw with Zillow Offers based on another review by Bloomberg which stated: Zillow’s “Zestimates” algorithms make home price predictions for buying houses on a massive scale resulting in small profits on every flip.” So, their price predictions are flawed.

ABC News on November 2, 2021, confirmed Zillow’s flawed price prediction with its story titled: “Zillow to stop home-flipping amid pricing ‘unpredictability’.”

CBS News on the same day reported, “Zillow to lay off 25% of its workforce and shutter house-flipping service.”

 

The Risk of Fixing and Flipping Houses

 

The Risk of Fixing and Flipping Houses

You heard of the old business saying: “Buy low and sell high”? This is a big risk in the flipping houses business because:

It takes time to make an offer on a house needing fixing;

  • Get through the closing;
  • Begin renovations;
  • Put the house back on the market;
  • Advertise the house for sale;
  • Negotiate with buyers;
  • Sign a sales contract; and
  • Go through closing.

At any time during this long process, the housing market may shift downwards. When that happens either the house never sells at a profitable price or the buyer uses a contingency (like the appraisal or financing) to back out of the sale.

Note: This is a good time to suggest reading our blog post titled: What are Real Estate Contingencies in California?

 

How Do You Lower the Risk of Fixing and Flipping Homes?

 

In May 2021, Investopedia published an article titled: 5 Mistakes That Can Make House Flipping a Flop. The five mistakes are:

  1. Not enough knowledge about picking the right house in a good location at the right price;
  2. Not enough skills like electrical, plumbing, and house building;
  3. Insufficient funding to pay for the purchases like cash to avoid costly financing fees and interest;
  4. Insufficient time to buy, renovate, and flip in case the housing market dips; and
  5. Not enough patience to wait for the right house at the right price.

 

Create Your Fix-And-Flip Dream Team

 

You need a “Dream Team” of 6 professionals to help you buy, renovate, and sell. Million Acres in a February 2021 article recommends six team members:

  1. A House Inspector experienced enough to eyeball and estimate renovation costs after crawling through the entire house to inspect the foundation, roof, electrical wiring, and plumbing;
  2. A General Contractor experienced and reasonably priced with the time to fix up the house fast before the housing market tips downward;
  3. Mortgage Professional if you don’t have the cash. You must find a mortgage lender (or broker) experienced with fix-and-flip loans;
  4. Insurance Agent because fix-and-flip projects don’t qualify for standard homeowner insurance. This requires an insurance agent experienced with finding the right insurance for your projects;
  5. Real Estate Attorney experienced with fix-and-flip legal issues. You may never need an attorney, but having one available for legal emergencies is important; and
  6. A Realtor who knows the area, market prices, and trends. Buying and selling without using an experienced fix-and-flip Realtor may save you some money, or not. That’s because a good Realtor knows how to find the right house, negotiate a lower price on the best terms, and make your closing easier.

SoCal Lifestyle Realty offers experienced Realtors who know San Diego County’s housing market. Contact us whether you want to fix and flip or buy homes to rent.

 

Advantages of Renting Rather than Flipping Homes

 

In January 2021, Investopedia answered the question Flipping Houses vs. Rental Properties?” The advantages of renting include:

  • Owning homes lets investors accumulate wealth over time (appreciation);
  • Renting homes provides positive monthly income and tax advantages over flipping; and
  • Avoid landlord problems by hiring a property management company.

The WeLease Property Management Company offers experienced managers who can help you own rentals without the landlord hassles. WeLease serves all types of rental properties in San Diego County.

WeLease also publishes informative blog posts to help housing investors like:

Contact WeLease to learn more about their services.

 

Should I Flip or Rent Homes? – Conclusion

 

When we posed the question: “Should I flip or rent homes”? We gave you a straightforward answer. Rent instead of flip.

You can make money flipping homes, but you need the knowledge, skills, money, patience, and time to buy the right house in a good location. Also, you need to get the fixing done fast to sell when it’s a seller’s market. Lacking any of these can result in losing money.

Zillow failed in 2021. Their algorithms underestimated the near future for the housing market. Ending up with a backlog of fixed homes for sale during a price downturn will hurt any fix and flipper. Likewise, inexperienced investors face greater risks of failure than seasoned large fix and flip companies like Zillow.

You need a dream team of six professionals to succeed in the fix and flip business like:

  1. House Inspector;
  2. General Contractor;
  3. Mortgage Professional;
  4. Insurance Agent;
  5. Real Estate Attorney; and a
  6. Realtor.

 

Interested in Buying Homes in San Diego to Fix and Flip or Rent?

 

Our SoCal Lifestyle Realty staff helps real estate investors in many ways. Our Realtors help you to look in the best locations throughout San Diego County. We negotiate the lowest prices with favorable conditions and terms. We help investors wanting to fix and flip or rent homes too.

Contact us so we can show you our unique RealScout program that uses your desired features to seek the best homes in the greater San Diego MLS listings system. This saves you time by focusing on the homes you want.

 

Steven Rich, MBA – Guest Blogger