Buy a house in a rapidly rising market, fix a few things, then sell it quick. Make lots of money in a few short months and the annual rate looks marvelous. That would seem to be an obvious strategy in Seattle and Washington; but surprise, it’s happening less here than elsewhere.
Pew Research released a report on flipping around the country. Washington State comes in at No. 23 with flipping only accounting for 4.9 percent of sales. The national average is only 5.5 percent; but back in 2006 it was more like 9 percent. According to MyNorthwest.com, the average gross profit in Seattle was $97,002. Why the few flips even with a 48 percent gross profit for the median flip? A couple of things make a big difference.
According to the Real Estate Investors Association of Washington;
“Substitute House Bill 1843, and the resulting law, requires "property owner developers", including flippers, to be registered and bonded as general contractors.“
So much seeing a good deal, buying it, doing some nominal fixes, and selling it again. Buyer protections were put in place to make sure the improvements were done by people who were licensed and bonded. If you buy a flipped house, there’s at least some recourse if something wasn’t done properly - the reasoning behind the $12,000 bond.
The other reason is simple business economics. Gross profits aren’t real profits. As we wrote about a while back, it is easy for a $125,000 gross profit to be sliced down to a net profit of $23,750 from the costs of repairs, the cost of maintaining it during the repairs, financing, and selling costs. An expectation of making $125,000 in less than a year is dreamy. Reality is that, if you manage to do that twice in one year you’re making an annual income of $47,500 - without benefits while taking on all the risk. Of course, you could flip more expensive properties; but that takes more money and more risk. Fine for some, probably for about 4.9 percent in Washington.
Of course, if you happen to find the right house, at the right price, and you have the right paperwork, maybe...