You often hear that the best investment is real estate. You also often hear about people who buy a home and a few years later cash out and sell it for a nice profit. These types of stories are all over the place, but it is not as easy as it may seem. In fact, if you are not careful you can lose everything you have in trying to flip real estate. This is a cautionary tale for those thinking about flipping real estate based on the experience of someone that lost everything at age 52.
My father is not a dumb man; in fact he is pretty smart. When he told me a few years ago that he wanted to use what he had saved for retirement as a down payment on a beach front condo I did not even think twice about it. I asked him what he was going to do with a beach front condo five states away. He told me that he had met a real estate agent in the area who told him she had worked with many out of state buyers and all had successfully flipped condos for a nice profit. She also told him he could rent out the place until it sold to cover the mortgage payment. He had never done anything like this before and was going on the word of this unscrupulous real estate agent.
Fast forward a few months and a hurricane hits the Gulf region making the condo unlivable for the time being. Property value in the area fell much like the rain that was coming down into the condo where the roof used to be. During the eight months that the condo was in the process of being repaired it could not be rented which meant that my father had to pay the condo mortgage payment while trying to meet the mortgage payment of his primary home. As one of the few condos that was mostly left in tact by the hurricane the real estate agent told him to raise the price and assured him it would sell now, for more than they first thought, since so many condos had been damaged beyond repair from the hurricane.
Fast forward to six months ago and the condo was still not sold. In fact, several condos from the same complex were listed for sale and my father had to lower his price on the condo to be competitive. Lowering the price put it at less than what he paid for it. So, why did he do this? He cannot afford to pay two mortgage payments because even though the condo is livable now it is not renting to capacity each month. Over coffee he told me he either needed to sell the condo or his primary residence to avoid foreclosure on the condo. He was prepared to take a loss on the condo just to get out from under the burden of the ARM loan mortgage which was set to have an interest rate increase in March 2007.
It was not long after that conversation that paying the two mortgages along with the rest of the bills caught up with him. He was unable to sell the condo, even at an amazing loss and it ended up getting foreclosed. The bank took his paid off primary residence as well. He had tried unsuccessfully to sell it before it got taken. He had remained hopeful up to the end that he would be able to sell one of the properties. Maybe if the housing market had not gotten so bad it might have turned out differently.
I asked him why he had tried to flip real estate in the first place if he did not know the consequences. He told me that he was trying to make some money for retirement. Now, he does not even have a house and is instead renting a place to live. Gone is the down payment amount he used from his retirement for the condo. As mentioned in the article Common Problems When Flipping Houses, he did not have a good, solid plan in place to make sure the outcome was a profitable one for him. Unfortunately he is not the first person to get burnt trying to flip real estate, with Casey Serin of the now defunct I Am Facing Foreclosure site being the most well know.
Before trying to flip real estate you should do your homework so that you do not end up like my father. A good place to start is the article 12 Common Mistakes to Avoid when Flipping Real Estate for Profit.