The lowdown on flipping houses in Atlanta
CREDIT:Joseph Gareri
Home renovations can get messy.
By Walt Lawrence
A Realtor, a developer, an MBA, and a No-Money-Down seminar graduate walk into a bar. Booze and opinions are in plentiful supply. Their question: What’s the easiest way to make a small fortune flipping houses in Atlanta? Their answer: Start with a large one. Old humor to be sure, but the underlying element of truth makes it still relevant. Buying the wrong property could cost you a lot of money.
WHAT’S HAPPENING NOW
“Nobody is flipping properties in Atlanta today,” says Jerred Morris, a not quite 30-year-old manager of a private investment fund, who maintains a real estate license with Advantage Atlanta Realty. “You just can’t get anyone to pay full price.”
What happened to the many local real estate investors who still hold unsold renovated properties that now must compete with traditional listings as well as foreclosed properties? Many experienced Atlanta renovators/investors maintain that most of the “spec investments” in the last few years have been made by newcomers who have been lured by popular TV programs that seem to settle all problems in 30 minutes, or investors who have been motivated by the many half-day seminars on the subject.
“There is no sure thing,” says Marsh Piece, co-owner of Hawks Nest Investments, who owns 11 properties in Atlanta and Washington, D.C. His brother Rob Pierce adds, “The toughest and scariest deal to do is the first one.” Success often requires a huge time commitment that some investors simply cannot make because of their other careers or are not willing to make once they find problems. A lot of the time is spent even before any construction begins finding the “good” investment. Often, some claim, only one in 100 opportunities really makes any financial sense. At the same time, there’s competition from all those other potential investors trying to chase down that same “good” deal; somewhat reminiscent of trying to stake a rich mining claim in the midst of the California gold-rush.
ATLANTA BASICS
For the uninitiated, what exactly does it mean to “flip” a house and how is that different from the traditional buy/live-in/sell process? The use of “flip” to describe the real estate transaction has ambiguous origins. Much like dealing a single playing card from a fresh deck, the card is turned over or around with a light quick motion. So, too, with the “flip” house: the investor’s intent is often to sell the property as quickly as possible for the most gain, with the least amount of fix-up money put into it. On the other hand, the traditional homebuyer selects a home that meets his criteria, occupies the house for as long as it remains suitable, and sells the property when it comes time—hopefully for a gain.
Certain dynamics have always influenced property values in Atlanta: a property’s location, buyer demand, the land’s size and shape, and total value contrasted to prevailing market price. “Price is what you pay and value is what you get,” according to the Georgia Institute of Real Estate. Add to those considerations the effect of the lifecycle that each individual home and neighborhood goes through over time. The initial phase starts when the property is first built or developed. Generally, this is a period of rising values. Next comes the maturity phase, also known as “equilibrium” in banking circles, where home values in the same location tend to level off. Last is the decline phase, where homes physically deteriorate or the neighborhood gets run down. At this point property values actually fall. With the passing of time, however, some well-placed neighborhoods go through a booming revitalization. Conditions change so that the neighborhood’s lifecycle starts over again, with much higher values.
MAKING THE DEAL
A great example of such revival in Atlanta is the Virginia-Highland neighborhood. Bounded by Morningside on the north and Poncey-Highlands on the south, Virginia Highland was established in the early 1900s. Its original heyday passed as the population moved to the suburbs all but abandoning the neighborhood to aging residents and the hippies of the 1960s. Later, many couples bought affordable homes there to fix-up and live in to be near Emory and Piedmont Park. The value of their homes jumped as the renovations were completed. During the ’90s, investors began to be attracted to the beauty of the neighborhood’s flip potential. The boom was on. “We call it ‘Downtown at your doorstep,’” says Marsh Pierce of the brothers’ rental property on Bonaventure Avenue. “It was a lot of hard work.
Veteran investors warn that caution must be used in the approach to any renovating opportunity. “If you don’t like physically working on a house, you just shouldn’t try to flip one,” says Steve Miller, who with his wife and seven sons, work on five to seven houses a year. “You figure the cost of repairs; then double it. That’s doing it yourself or using a handyman to help.” Paying for a contractor’s overhead and profit to do the same work can greatly reduce any potential profit.
An often overlooked variable cost factor in the flip transaction is the individual investor’s credit rating. A clean credit history gets the cheapest loan. The cost of borrowing for renovation and then for a mortgage can make the difference as to whether the project cash flows positive if it has to be rented until sold.
The most recurring advice: “You make your money going into it, not when you sell it.” SP
