One of the most significant risks related to house flipping is holding period market risk - it's the risk that during the time in which you're holding the property you intend to "flip," the property value will decline.
The decline in property value can be caused by a variety of reasons (macro recessions, localized events, etc.), but that's not the point of this short piece. The point being made here is that house flipping exposes the "flippers" to significant market risk.
Not taking this real estate market risk to which you're exposed to when pursuing a house flipping strategy into proper account and consideration may have some serious negative consequences. The negative consequences are rare - they only arise in market downturns, which happen once every number of years. But, although the chances of the risk coming to fruition are small, the severity of the negative consequences (should there be a real estate market decline) are severe. The consequences can be severe enough to wipe out investors that are not well-capitalized and in positions of strong liquidity.
This is pretty easy to see if we think about a hypothetical example. Let's say you're doing house flipping and you buy a $200,000 property. The timeline might look something like this:
The risk exposure continues until you sell the house. So, in the above example with the relatively rapid renovation and resale (likely in a good real estate market; very unlikely in a real estate downturn), the investor or flipper would be exposed to market risk arising from adverse moves in the real estate market for at least a few months. If the investor is new, inexperienced, or doesn't have a lot of capital/liquidity in reserve, things might be over in one serious real estate or economic downturn.
If you're holding a property that's worth less than you bought it for -- even with the improvements you made or might make -- you'll have to (1) either accept a loss on this investment or (2) you'll have to continue making mortgage payments on the note until the market recovers.
In the first case, you'd lose real money - you'd possibly lose your entire down payment and in the worst scenarios you might be so underwater that you'd have to add additional funds to be able to get rid of it. This isn't far-fetched. Many people all across the United States experienced this during the Great Recession that started in 2007/8.
In the second case, you'd avoid having a severe capital loss, but you'd have to outlay money every month to keep the mortgage note current. This can be costly, especially if this is done for many months or even many years.
Of course, you might have bought the house in cash - in that case, you still may experience a severe loss (you'll just never be underwater on the mortgage). Renting might also help mitigate the risk - if there's a downturn, you might abandon your initial house flipping strategy and put a tenant(s) in the property for several months or years to help with the mortgage payments.
A prudent house flipper or potential house flipper would take these risks into account. Everything is exposed to risk, so this article isn't attempting to say that real estate investing in general, or house flipping specifically, are imprudent investments or that there's undue risk in a house flipping strategy. The article simply attempts to highlight a particular type of risk that house flippers are and will be exposed to.
Cities vs. Nations - Cities have been and will continue to be the true drivers of economic growth and development in the 21st Century
Nations and countries are illusions at the most basic level of reality. Cities are too, but far less so. Where the idea of a nation like the United States exists only in our minds, the idea of a big city like NYC or Los Angeles exists both in our minds and in the immediate world around us.
Cities are were life and economics happen:
Cities are where stuff happens - countries have cities and benefit from them, but can you name things that happen economically in a country but that doesn't happen in a city? Asked differently, what can you point to that's economically beneficial that, at its core, is something that happens in a country but not in a city? It's hard to think of an answer because most economically beneficial activity happens within cities themselves - nations benefit, but it's not within the nation that these things originate. Think about this another way - if you're city was run by idiot monsters who made only bad decisions, what could the national government do to fix things? The answer - not much.
When news businesses are started, when new museums and coffee shops open up, when ideas are created and implemented, or when intelligent and driven entrepreneurs drive intense economic growth in an area, it's all city-based. Cities are the economic engine of the modern world and, therefore, way more focus should be placed on cities and far less focus should be placed on nations.
If people focused as much on mayoral and city council elections as they do on Presidential races, we'd start creating better cities. A city like Detroit, for example, will never be improved because of national decisions - more granular decisions at the city level (and by people who understand local dynamics) are required. People must take city life and the responsibilities that come with being part of an urban community far more seriously in the 21st century - through that, the nation will become great on its own.
Check out a UN Habitat piece on the economic role of cities here - it's an interesting piece on how cities are the driver of economic growth globally in today's world.
We're two decades into the 21st century and real estate transactions, at their core, are still as archaic as they have ever been. Any first time home or condo buyer will understand how ridiculous the process is - it's a process that involves:
The four steps to a real estate transaction, simplified a lot
In a general sense, the steps of a typical residential real estate transaction (or even a small retail real estate investment) are as follows:
Step 1 is easy, and Step 2 is relatively easy in practice in developed real estate markets like those in the United States and Canada. Step 1 is easy because the decision is binary, and only one party is involved (the buyer). The "buyer" might also include the buyer's family, but it's all one party when the binary decision needs to be made. Step 2 involves a real estate agent, but it's usually not overly complicated or unpleasant.
Unlike Step 1, Step 2 includes another person. But, this other person isn't truly an interested party to the agreement/transaction that's going to happen down the line. The real estate agent is simply someone helping the buyer with the process. A buyer's agent (as opposed to a seller's agent helping to sell the house) helps the buyer find a place while maintaining a responsibility to act in the buyer's best interests. You, in effect, have a knowledgeable real estate person in your corner -- that's what a buyer's agent is. It, therefore, makes a lot of sense that Step 2 isn't the bottleneck in the process – it's, in fact, the core part of the process itself; it's in Step 2 where the house buying actually takes place.
Once you pick a place, you need to fund the purchase somehow. If you've got the cash set aside, you can skip Step 3 and go directly to Step 4, which involves actually executing the transaction. If you skip Step 3, you also only have to contend with a 2-party sale instead of a 3-party transaction because the lender isn't in the picture.
For most of us, however, Step 3 is needed – we either don't have the money to buy a property outright, or we can't do such a thing more than once and need to use other people's money to obtain assets as we grow our real estate portfolios/businesses. In this case, we'll need a lender – this will almost surely add a ton of complexity to the process and prolong it.
Lender's due diligence adds a ton of complexity to real estate transactions
The primary reason using a lender adds so much complexity is because the lender faces a very significant amount of risk – they are giving you money to buy a house with most of the purchase being put up by them and only a small portion being put up by you (e.g., the down payment). With the lender financing 80% to close to 100% of the purchase price, they are exposed to significant credit risk and are prudent with not taking this lightly. A lender will require a ton of documentation from you so that they can perform the necessary due diligence to (1) understand, (2) mitigate, and/or (3) prevent unacceptable risks. These risks include the following:
All of these due diligence steps lenders take to provide themselves (and future buyers of the debt) with assurance over the quality of the credit risk they are taking on. This process can involve a lot of people – these may be people working at the actual firm lending the money and third-parties like appraisers, inspectors, insurance agents, and bankers.
If technology is to further assist in the real estate transaction process, it's in Step 3 where the most value can be added. An easier way for providing assurance over borrower quality and for determining title might help house buying and selling go a lot faster. If, for example, all property claims or titles were stored on a secure blockchain, title might be able to be ascertained far quicker than it is today.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).