3 Things I Learned from Watching Property Ladder: Lack of Fundamental Analysis, Misunderstanding of Construction Time Lines, and Too Many Real Estate Books.
I’m sure many of you have seen TLC’s Property Ladder show. It is a similar show to Flip This House except I’ve noticed that Property Ladder is more willing to show flips that have gone bad. If you haven’t seen the show the premise is simple. Someone buys a home, has a budget and time line, and tries to get away with as much profit on a greater fool. After mulling over the shows, I’ve noticed a common thread and psychology with many would be flippers and real estate moguls. First, most of these people have failed to do a thorough market analysis of the area. What would the property lease for if you couldn’t sell? How long of a time line do you have before your carrying costs knock out your profits? It doesn’t seem like they’ve taken anytime to be realistic. Yes, in the last few years we’ve seen people make out like bandits but then again, they were selling and buying in an epic bubble with lax lending. When you can sell a $720,000 home to a farmer making $14,000 I wouldn’t exactly call it financial prudence.
Now that standards are tighter the margin of error is shrinking. Next, most of these people have a lack of understanding of the construction costs and timelines. Remodeling is no cakewalk. You have the good, the bad, and the ugly when you deal with construction projects. This one team of would be flippers were trying to flip a condo in
With this same team, they openly stated that they were going to do double-digit flips in one year. That was before their two week project turned into a four month challenge. This isn’t common only to these flippers. In fact, these are words taken verbatim from multiple Pollyanna real estate books. Doing a quick “real estate” query on Amazon you will find 153,000+ books on the subject. I assure you that you do not need that many. I wonder if they ever thought how publishers make profits? In fact, I’ve read many of these books, at least fifty and there will always be unforeseen contingencies that will occur that these books will fail to foresee. The numbers never play out perfectly. You will always hear on the beginning of property ladder a book planned budget before they actually get into the trenches. Theory to practice is much harder.
Lack of Fundamental Analysis
I realize that these shows are on a tight timeline and everything is hurried and for dramatic effect. But even a basic back of the napkin calculation can tell you if a deal is good or not. The fact that many of these shows have been running for years during the peak of the housing bubble created a mass belief that flipping houses would always be an easy process; in fact many of these shows fed into the issues we are now facing. There are 3 simple ways for real estate valuation. Using a combination of these methods would help many would be flippers from encountering major problems. In addition, there is never any contingency plans on these shows. We all know that life is unpredictable. Hope for the best and prepare for the worst. These folks hope for the California Lottery and prepare for the best. My question is who in the hell is funding these people? I’m finally starting to see some flips gone horribly bad televised. My take is that shows take awhile before they hit the airwaves so there is a lag factor. The major credit crunch only hit in August. I wonder if they’ll continue airing these shows and maybe change the title to Flip this Short Sale. After all, even Ben Bernanke in May of this year was saying that the subprime market would be contained. I wonder if he watches Property Ladder?
Misunderstanding of Construction Process
Construction is the litmus test of this entire housing market. When we look at major builders and see them having difficulties, you can rest assured that the overall consumer market will contract as well. That is why there have been pullbacks in companies such as Home Depot. All these sales of the century are now competing with your flip. You can rest assured that builders have more of an advantage and can cut prices faster than you can say “price reduction.” This creates more added inventory in an already declining market. These shows will never talk about the credit crunch except as a footnote into their juggernaut of flipping homes for absurd prices. Certain construction projects take time and you need to find the right people to work for you. You need to have your team in place before you even undertake a project. This one couple was using their computer and using Google to figure out how to tackle massive projects! You can’t help chuckling as you see the guy sitting there and probably typing “tutorial on installing plumbing.” You can’t nickel and dime these projects. And since you’ve gutted the place and payments are now rolling in, you really don’t have much time to negotiate major construction projects. A kitchen remodel or redoing a bathroom will take time. Now guess what? You are competing with home builders that have mastered the art of faux luxury and staging, so good luck on trying to squeeze out a $20,000 profit simply because you used Feng Shui. You’ll realize why more and more potential buyers are deciding to rent than buy.
Too Many Real Estate Books
Which bring us full circle. I’m sure you know or have friends in your immediate circle that I like to call walking human parrots, WHP™. Sometimes you’ll need to do a double take otherwise you’ll mistake them for a talking head on a cable show without the rectangle around their head. Folks on these shows sound like they are simply repeating from rote memorization their favorite housing book. There has been another bubble that I have failed to talk about but is clearly present. There is a massive bubble in real estate books. Since the profits in real estate have been criminal these last few years – no seriously, some companies have been so brazen they have thrown out sensitive housing files into public dumpsters – you realize that many folks decided to jump into the industry. Staging professionals. Luxury end realtors. Certified kitchen remodeling specialist. Did someone crack open a Kaplan GMAT study book and jumped to the verbal section? When you watch these shows, get out a notebook and write down every real estate cliché you hear. “Real estate never goes down” or “redoing your kitchen will yield a 130 percent return on your investment.” Says who? These rules only apply in appreciating markets. In down markets you’ll need to remodel homes simply to move the property. The gimmicks are running out and so is the funding. I wonder if these shows will go the way of the subprime market?
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