On the Business of House Flipping

By Adam Katz, Minyanville

NEW YORK (Minyanville) -- Though I am working to build out the investment side of my real estate business to focus on developing a long-term residential rental model, I do actively manage the portfolio and "flip" a lot of projects. Because of this activity and low housing prices, I get asked about the business of being a "house flipper" pretty regularly. So, first let me state that this is a high-risk game and NOT for those with a weak stomach and I am not advising anyone do it. But, I am happy to share with you the thoughts and logic that drive that side of my business.

What historically occurs during periods of economic strife and low employment is that people gravitate toward urban areas, because that is where the jobs are concentrated. Here in Phoenix, I see a lot of home flippers buying houses for $60k out in the middle of nowhere (Buckeye, Maricopa, Apache Junction ... sorry if you are from there), putting $5k worth of paint and carpet in the home and selling them around $80,000. I also know people who are buying at $80k and trying to sell for $95k.

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Anyone smell a greater fool? I'm not smart enough to know who gets left without a chair out there when the music stops and so I don't play that game. Furthermore, I often hear the argument that people are migrating to the outskirts of the greater metropolitan area for more affordable housing. To them I ask: Do you want to bet your dollars on people who have opted for a 90-minute commute at $4/gallon gas to be driving the profitability of your business? Whether they are in the business of flipping or renting, they are betting on a consumer that has a likely negative trajectory with respect to their personal finances.

Now, contrast that with what, not surprisingly, is going on in urban areas where there is some decent job growth. Phoenix's unemployment rate is hovering around 8%. While certainly not healthy, it is below the national average and showing some moderate improvement.

Specifically, we are experiencing growth in primarily four areas according to the Bureau of Labor Statistics: medical, technology, leisure/hospitality and professional services fields. These fields typically employ upwardly mobile professionals that are able and willing to either rent or purchase homes at a premium. My business makes it a point to produce homes that have features, both functional and aesthetic, that speak to this market.