The first thing that should be noted is that when doing so in a seller’s market, speculating in real estate is a great way to bring home considerable profits in a relatively short period of time, so to speak. The problem is that we currently seem to be experiencing what is called a buyer’s market, from one end of the spectrum to the other in the United States. Foreclosures are at an all-time high, which means the market is suddenly saturated with properties for sale.
While this is great news (believe it or not) when it comes to getting a property at a lower price, it also makes it difficult to convince buyers to pay top dollar when there are better bargains down the road. This is, of course, one of the main risks of the real estate investment program known as “speculation”. The huge profits most investors seek cannot be achieved if the property cannot be purchased, remodeled and sold quickly.
Unfortunately, at present, very few properties can be sold quickly in any city. In this case, the worst case scenario is that you are forced to either absorb the loss (which in extreme cases can lead to severe financial hardship or bankruptcy) or rent out the property (which in most cases negates all efforts made to rehabilitate the property. Not being able to sell the property being flipped is probably the biggest fear of every real estate investor engaged in this type of investment. In this case, rather than wait for a better price and risk further losses in the future, it is often better to drop the price and take the loss.
Unfortunately, these are not the only risks associated with flipping a property. Another risk is grossly underestimating the amount of money needed to do the necessary work. This is a fairly common phenomenon found by many first time investors. Most people have unrealistic expectations of how far their money will go when it comes to investing in materials and labor to properly rehab a property. Even minor cosmetic repairs throughout a house can easily amount to thousands of dollars in repairs. On the flip side, once these repairs are completed, the potential profit can run into the tens of thousands of dollars.
Another risk that is often not considered is the risk of overestimating capacity. This is a risk that costs not only valuable time, but also valuable money. Not only are materials wasted in the process of discovering that you are not fully skilled at any given task, but there are further costs (often unplanned) involved in hiring professionals to repair damage and replace wasted materials. When in doubt, it is almost always best to hire a professional if possible. This can also result in missed deadlines, significant deviations from the schedule, and the addition of another mortgage payment (if not more than one) to the total price of the project.
The final risk is often something that simply cannot be seen or predicted. This was experienced in the days after 9-11 and should not be forgotten. Unforeseen things happen every day. Markets collapse; the local economy can be devastated by the announcement of a large employer going out of business (think of the collapse of companies like Enron and WorldCom and the impact they had on the local economy). In these cases, it takes quite a while for the market to recover from the shock to its system, and “speculators” and other investors often feel as lost and broken as those who have been hurt by these companies – neither through no fault of their own.
Things happen, things that are completely out of our control, and they are almost always the things that affect us the most. The same is true when it comes to real estate investing. The state of the economy, the housing market in an area, and the sudden announcements that affect both often have the most profound impact, for better or worse, on those who invest in property in those areas. The trick is to decide which risks are acceptable.