What you need to know before you consider flipping a house

If you've ever considered "house flipping" as a way to make some extra money, there are some things you should know before you start.

"I think it sounds like a quick and fast idea to make some money - buying a house at a low cost, fixing it up quickly, and turning around and re-selling it - why can't anybody do that?" asked Jamie McKenzie of the Quad Cities Better Business Bureau.

That question is what inspired Than Merrill, a former pro football player turned real estate investor on A&E's "Flip This House," to launch a company called FortuneBuilders.  The company offers traveling seminars offering to teach people about house flipping.

After hearing about the seminar in a radio ad, we sent a woman with a hidden camera to a FortuneBuilders free, two-hour seminar in Davenport, Iowa.  She estimated there were about 60-75 people at the seminar she attended.  Some were laborers who do work remodeling houses, some owned rental properties and some appeared interested in the business of house flipping.

"You saw people who, you could tell this was, you know, they were hoping this was going to save them," she described.

The seminar began with a representative from FortuneBuilders telling attendees what kinds of programs they offer.

"The first one is called the Insider Summit," the representative said. "It's a three-day, hands-on workshop where they teach you, step-by-step, on how to invest in real estate; providing you with the tools, the resources and also the money to do your deals."

Our employee said she believes it's the money part that interests people the most.

"It's the promise of, ‘You're going to be able to make money.’ This is quick, easy, flip this house, get it, no money down, you don't have to invest your own money-type of philosophy; that everybody can do this, and you can make money rather quickly," she said.

While the introductory seminar was free, the rep said the individual rate to attend the Insider Summit was $1,197 if you sign up on their website, but $197 for attendees that signed up at the introductory seminar.

Our employee said many seminar attendees signed up and paid the $197 that night.

"There was even one gentleman who did not have the funds at that time, and he didn't have a credit card, and they were talking him into calling a friend and asking that friend to pay for it for him," she said, "And then tell the friend that when he sold his first deal, he'd pay them back."

Those attendees should be careful according to Lenny Wilkinson, who has been in the remodeling business for 28 years and is president of Bettendorf Home Repair.

"They're there to make money, and they're not making money flipping houses," he said about forums like the FortuneBuilders introductory seminar.  "They're making money (by) getting people convinced that they can make money."

The potential risks

Rehabbing houses is a huge commitment and a huge risk, Wilkinson said, and he dislikes the term "house flipping" because it makes the process sound too easy.  When his team rehabs a house, it takes a lot of hard work for his team just to make their margin on the property.

"I can tell you that a good 40% of all the properties we've ever done, we found surprises that required an engineer to come in and solve for us; and once an engineer steps onto your property, there's $1,000 spent right there," Wilkinson said.

"You need to get with some real good professional people, and they need to be guiding you in the right direction and you need to go into it with eyes wide open," Wilkinson said.

McKenzie, from the BBB, said some of the information offered at the seminars might be legitimate, but she echoed Wilkinson's cautionary advice.

"I mean, they're going to give people enough to be hungry to want to pursue it, but I can't see how you're going to walk out of those seminars and just be like, 'Alright, I'm going to do this and it's not going to fail.'  I think there's a risk even if you have been a business owner. There's a risk with anything," McKenzie said.

Potential benefits

The rep from FortuneBuilders does talk about the risks in the introductory seminar, our employee said.  The rep also said the Insider Summit would offer information about potential tax savings.

While our employee found that helpful, she said she believes you can get most of that information for free.

"What they're doing is, they're making money on providing a service to you, and that service is to educate you, but you can do it on your own. You really can, and not have to spend the money," she said.

McKenzie adds that you never know if you can really trust a business, so the more you can research and learn about a company before you give them any money, the better.

"If you are considering participating in the program, definitely read the fine print," McKenzie said, "And if you need time to think about it, definitely take that into consideration.  Contact a financial adviser, a tax adviser."

Reality check

The vision of easy money must be tempered with the reality of what house flipping involves, Wilkinson and McKenzie agreed.

"I think those seminars really promote that idea, that just about anybody can come in, learn the process, and be successful," McKenzie said, "But there are a lot of things that need to be considered before you attend or after you've attended.  How are you going to approach things?"

"You have to understand that most of those properties that are up for sale,they've already been picked over," Wilkinson said.  "If it's a foreclosure home, the bank has already had first crack at it.  The second people that have a crack at it are the realtors, because they see all the listings before they ever go on the MLS."

"A person that is not in that game is getting what's left over," Wilkinson said,  "And knowing that you're getting what's left over, you need to go into that thing with a realistic idea of what your budget should be.  Nine times out of ten, you're looking at replacing all the plumbing, you're looking at replacing a fair amount of the electrical and most of the mechanical."

Overall, Wilkinson says to not look at "house flipping" as an investment opportunity; but rather as a job.

"It's going to be a job.  It's going to be a hard job.  You're going to have to work hard, and you're going to have to be really lucky to make some money," Wilkinson said.