Monday, October 15, 2007

Real Estate - Fixer Upper Arbitrage

How many times have you heard someone exclaim, "You know if I buy that house, put fifty grand into it, I can sell it for a hundred grand more..."?

I have heard it more times than I could count - which is no small number!

The fact is, after you pay all the transaction fees: closing costs, title insurance, real estate commissions, etc., the theoretical profit of such a flip gets whittled down to nothing.

For example, if the house costs 600k and your "updating" yields a sale price of 700k, the 5%-6% real estate commission alone will erode $35,000-$42,000 of your massive 50k profit.

Sure, arbitrage as I have outlined is more doable with lower priced homes as the transaction costs are smaller in dollar magnitude but I submit that these opportunities, generally speaking, do not exist.

They don't exist because they have been arbitraged away by contractors. In this housing bull market run, all these obvious buy, fix-up, and flip-for-a-profit properties have been scooped up by professional contractors - men who know a little be more than everyone else about updating costs. Also, bear in mind that they can do the work cheaper than you as well.

So, the next time you contemplate buying a speculative fixer upper that's been languishing on the market for months, remember that all sorts of professional contractors have scouted and rejected its prospects already.

Oh yeah, and don't forget that housing prices, broadly speaking, are going to drop at least another 20% from today's levels.


Taylor Conant said...

Individuals trying to "flip" single homes are probably stupid, but lots of big real estate companies buy up entire apartment buildings, spruce them up and then flip them at a profit. Of course, they can do so because of the economies of scale that come with such a purchase.

Anonymous said...

What is that BMW doing in front of the wreck?

CaptiousNut said...

That car must belong to John Edwards' foreclosure investor!