“It’s going to cost how much?”
“That’s really eating into our budget.”
Common freakouts on the show Flip or Flop on HGTV. A married couple owns a real estate business, where they buy homes at auction (often sight unseen) with the hope of improving the property, so they can sell it at a profit.
Nobody knows what the houses really look like until after the closing, so it’s a real nail biter to watch (for me, anyway!). Generally, the homes are somewhere between disrepair/rundown and utterly destroyed with plumbing, mold, building code issues or worse.
The couple brings in contractor for bids on updating kitchens and bathrooms, as well as updating other urgent areas of the house. When everything is done, they stage the property and hang a “For Sale” sign.
I know it’s a TV show designed for entertainment, but consider the money realities of having a successful house flipping business:
- You need a lot of cash up front to purchase the house at auction. For example: $300k to purchase a house in a neighborhood where homes sell for $550k. If you don’t have the cash yourself, you find a business partner (with whom you’ll split the profits) or other lender.
- You need a lot of cash to pay for improvements. Then you need up to $50k for known improvements
- Then you need another $10k - $50k for “surprises” lurking behind the walls, under the foundation, in the attic, and so on.
- You just don’t know how much it will sell for until you get an offer. You could make $100k (an amazing flip), $2k (pretty much a flop), or lose $20k (mega-flop), depending on the project. It’s a really risky business. And don’t forget, if you have a business partner funding the project, you only get your share.
Does this sound familiar yet? To launch a business, you need massive cash reserves for your personal expenses as your business likely won’t turn a profit until year 2 at a minimum. Within your business, the start-up costs are considerable. There’s training, the website, the marketing. Over time, you begin to build a team. All cost money.
As your business grows, you invest further. Unexpected expenses pop up, things that you didn’t budget for when you first planned out your year (if you did indeed plan out your year). Maybe you decided to host a telesummit, or do a workshop or live event, or pay out massive affiliate fees.
All of sudden, you’re up to your eyeballs in unplanned expenses. So now you’ve got cash flow problems too! Yikes!
What do flippers understand about business that most entrepreneurs miss out on?
Profit. More specifically, short term profit.
The flippers are in it to win it – yesterday.
- They are exquisitely aware of every penny that they invest in the property. They need to balance the right amount of investment, so that the house is desirable and will sell quickly, with the purchase price of the home and the comps in the area.
- They understand return on investment. They’re betting that the $50K of improvements results in $125k of increased home value over the purchase price, leaving them with $75k profit.
- They know that time is money, and every delay from construction to building inspection, to finding a leaky pipe, takes away from their bottom line.
Are you making decisions in your business with the same attention to profit? Or are you flopping when it comes to take-home profit?
- Do you know how much money each of your offers brings in, and how much it costs you to deliver your good or service? Do you understand what your net profit will be, when all is said and done?
- When you decide to invest in your business, do you consider what it will take of your time, money and energy in order to get the expected return on investment? Do you turn $1 into $4, or do you lose $2 for every $1 you invest?
- Do you make decisions quickly, so that you can keep moving forward in the direction of achieving your business goals?
I’m not saying that the financial rewards or risks of flipping houses (in reality or the TV land version of it) is what entrepreneurs should aspire to. But the reality of this reality show is that many entrepreneurs can learn a lesson in profit from the flippers. Just give them 30 minutes and you’ll see what I mean.