High Risk and High Reward in Buying a Home Foreclosures

Flipping high-risk, high-reward

Published by news-press.com on May 29, 2005

Last week I participated as one of several guests on a WGCU Radio talk show hosted by Ryan Warner, and the subject was about flipping real estate in Southwest Florida. The term "flipping" is a common name used by real estate investors who buy real estate with the intention of immediately selling the property and earning a fast profit. Some of the questions posed by listeners who called into the program were: How do you flip a property? Is flipping real estate profitable? Is now a good time to flip real estate?

Handling these questions was a diverse group of people with a wide range of real estate knowledge. The talk show program's guest panel included Dr. Shelton Weeks, professor of finance at Florida Gulf Coast University and director of the Lucas Institute for Real Estate Development and Finance; J.B. Novelli, real estate broker of Century 21; Terry Wayland of Progressive Realty Group; and me. Frankly, I was surprised at the number of listeners who called in with questions about flipping. So, I thought it would be a good time to talk about the concept in this column.

First, let me say that flipping real estate in a rapidly appreciating market can certainly be profitable but also risky. Do not confuse it with investing in real estate. In my opinion, it can be compared to day trading on Wall Street versus the Warren Buffett-style of long-term stock market investing. Neither style is right or wrong, but, they are very different in discipline and in risk versus reward tolerance.

One method of flipping real estate is buying at a pre-construction price, then selling at a build-out price, or purchasing building lots in a rapidly appreciating area. Some prefer to search for foreclosures or distressed seller situations that may offer properties at under market values and then resell them for fast profits.

The strong demand for property in Southwest Florida offers ample opportunity for flipping, and, over the past three years, this market has seen more flip transactions than ever before. The process is profitable because of the short hold period. So, the annualized rate of return can run extremely high. Some flippers never take title to the subject property and simply assign the contract to another buyer for a profit.

In a rapidly rising market, flipping can work well to generate high rates of return, but, buyers must realize that a marketplace cannot rise at double-digit rates forever. Most markets need a period of time when moderate appreciation or even a leveling off of values occurs to allow other segments of the local economy to catch up to real estate values.

The best advice I can give regarding flipping property is this — real estate is generally a long-term investment. And, time has proven that the prudent and patient investor is most likely to make money in real estate with the least exposure to risk. A flipper should be prepared to hold the subject property for an extended period of time, in case their original short-term plan does not pan out.

— Frank D'Alessandro is a real estate broker with D'Alessandro & Woodyard Inc. — Commercial Realtors. Readers may contact him via e-mail at fdalessandro@dw-cr.com or by calling 425-6000.
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