June 25, 2006
Flipping Houses and Shopping
Not surprisingly, I’ve seen quite a few of those house flipping shows on TV over the past couple years (Flip That House, Flip This House, Property Ladder, Flip it Fast, etc). I know that these shows are of marginal value to serious real estate investors, but I can’t help but comment on one issue that seems to trip up almost everyone who is featured on the show: material purchasing.
I know that the producers edit the hell out of them and that the story told in the half-hour or hour during which you become a part of these investors’ lives is never all-inclusive, but it always appears to me that the featured flippers don’t really expend much effort seeking out low-cost materials for their renovation projects. Admittedly, 20 minutes of footage showing someone searching for the doorknobs on eBay probably doesn’t make for great television, but it always appears to me that the flipper simply walks into their local kitchen & bath showroom or home improvement store and spends 20 minutes choosing flooring, cabinets, countertops, etc from whatever materials happen to be available onsite. I always cringe a little during these scenes because I feel like it would not be that difficult to get a much better deal on what they’re buying if they had spent a bit of time researching their options and doing some comparison shopping before diving into major purchases.
I realize that staying on schedule will be a major challenge over the course of each flip, but I feel like you can add thousands to your profits by taking a little extra time to make sure you don’t overpay for big ticket items such as countertops and flooring. My (potentially unrealistic) thought for my first project is to base the décor of the kitchen and bathroom around the best deals I can find on nice countertop and flooring materials. There are a number of area retailers that carry these materials and I’m hoping to visit the majority of them to see what bargains are available. It’s a bit pathetic, but my current daydream is to find a big slab of granite that nobody else wants at some kitchen & bath place for next to nothing and then have that be the anchor for the design of the rest of the kitchen.
My wife, Christine, and I were one of the five flippers featured on “Flip it Fast” last month.
You are right, we don’t spend much time analyzing the cost of specific materials. In what we do (velocity-based flipping), labor costs and days on market can hurt our bottom line much more than the cost of materials. We know, for instance, that we can find ceramic tiles for a kitchen or bath for approximately $1.50/tile. If we shop around, we could probably find them for $1.00 apiece. But the $100 we would save in tiles is not worth the extra two hours of our time. Instead, we budget a bottom line for materials. Some items cost more, others less. But saving $30 on a faucet doesn’t yield a large return on the time investment undertaken.
On the whole, we could probably save between $1,500-$2,000 if we vigorously comparison-shopped, but our time is better spent managing our crew to ensure that they stay on task and complete renovations on schedule and on budget. For instance, every week that a crew is late costs us $1,400-$2,000 plus 25% of a mortgage payment. Additionally (a bone to us economists), the opportunity cost of spending too much time on a flip is that our money is tied up and can’t be utilized to purchase another flip, limiting the number of flips we can complete in one year.
Finally, used materials or end items that you find on eBay are usually not attractive materials to use in a home that you intend to flip for profit. You can comparison shop to the n-th degree when upgrading a rental-grade property, but not a flip. And the higher the expected ask price, the more potential buyers are looking for name brand, new appliances and high quality paint. You may be able to find the occasional appliance on the cheap, but you won’t save much by comparison shopping.
Our advice: get a Home Depot card and purchase the materials yourself. Stick to a materials budget +/- 10% with the mindset that materials will cost between 40-50% of the total cost of the renovation. Hire a contractor that charges for labor only and include in the contract a “stop-loss” provision. That means that if the contractor takes longer than the agreed-upon number of days he loses money (if you’ve ever watched “The Money Pit” you know what we mean). And don’t ever make a deposit larger than the cost of more than one week of labor. If you get bad vibes, get rid of them immediately. Visit the property everyday to ensure that the contractors know that you are in charge and are not an absentee investor.
Happy Flipping!