Letter: It’s not meant to eat

I have been heavily involved in the fix and flip industry for many years. I have Baruch HaShem succeeded in bringing in lots of yidden into the industry over the past few years. Many of them have made lots of money. I am a big believer in sharing what you know so others can also make a Living. Hashem has enough to give all.

I find it rather disturbing that there was recently a conference under the banner “NJ is one of the most profitable markets for residential real estate.” So you ask why? Well, the answer is simple, for the past 12 months, this industry has been practically dead. I speak to people every day that have lost their pants in the past 12 month. I invite anyone to speak to any demo companies, kitchen companies, flooring companies etc. As companies that service the fix and flip industry, they will all tell you that business took a 80% hit.

Who was this event geared for? Newbies. But hard money lenders and wholesalers will profit.

What is a wholesaler?

This story explains it.

There was a guy that bought a can of sardines for $1. He called his friend Yaakov and says “hey!” sardines sell for $3.50 in the grocery store, I have a good deal for you. I’ll sell it to you for $2 dollars. Yaakov buys it, and calls Moshe and says I have a great deal for you. Sardines sell for $3.50 in the grocery store, I’ll sell it to you for $3 dollars. Moshe buys it and calls Yehuda and says I have a great deal for you. It’s a can of sardines. If you package it correctly, there is “tremendous upside” – I can sell it for $4. Moshe buys it and sees right away that he payed too much, so he finds a newbie, Boruch, and explains to Boruch that if you have a long-term goal, then there is money to be made at the end.
Boruch buys it for $5.

One day, boruch thinks to himself, $5 is high for sardines, it must be a really good can of sardines. Boruch decides to open it up and taste it. When boruch opens it, he finds a can of worms. All upset, he calls Moshe and asks him what did you sell me? Moshe responds, you’re silly, sardines are meant to flip, not to eat!

Luring in people to fix and flip in this market is like convincing people to become mortgage brokers in 2008.

Fixing and Flipping is a complex industry which requires careful homework.

Remember: If it’s such a great deal, the wholesaler would have kept it himself.

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  1. Very True. I commented regarding this seminar when it was first posted here warning people, and it seemed like I was the loan voice. I am glad TLS published this letter.

    I am not active in R.E. now, but have been before, and looking for the right time to get back in. Making money in flipping has a lot to do with timing, and now is NOT the right time.

    This is not unique, this has happened before. When word starts spreading to the general public about money people made flipping houses, it generally means you are too late to the party. The smart money is getting out, and the dumb money or newbies are getting in.

    I have seen this happen in other markets and cycles, and see signs of it now. Homes in TR and Jackson selling for more than comparable homes in Lakewood, when the ones in Lakewood have shuls in walking distance, busing, basement rentals and the others do not.

    I see investors buying houses that have absolutely no idea what they are buying not doing research on basic things like the proper square footage of the home.

    I see flippers completely under-estimating repair costs, thinking that they are going to sell a $550k home to an end user with laminate flooring, and resurfaced kitchen cabinets. Reminds me of a time (years ago, before the last downturn) when I went to look at a home for sale by a “flipper”. I couldn’t find the heater, so I called the owner and asked him what kind of heating the home had, and he didn’t know. Turns out it had NO HEATING (probably had baseboard electric at one point that was pulled out).

    Unless you are experienced and know what you are doing, unless you want to lose you investment and destroy your credit, stay away from flipping. Stop don’t chase yesterdays hot investment. the potential loss can be much greater than any potential reward.

  2. Hi, if you helped so many people getting into this line how about helping me getting into fix&flip. I would love to get into the real estate business. And please don’t tell me to be a broker. I’m looking to make a nice living. Sardines is fish and real estate is gold. How can I get a hold of you?

  3. A lot of what this anonymous writer says is true and much is not accurate.
    There are wholesalers are simply in the business of flipping a contact or a deal just to make a quick 10k or 15k. They don’t wanna be involved in all the moving parts of actually flipping the house.Then there are some who are stuck with bum properties and try unloading them to unknown newbies.
    IMHO what has happened in the last is the following. Many more people started flipping in NJ the last year or so. That resulted in more competition for the same (auction) properties which drove prices up. The ARV stayed the same just the profit margin got smaller because of the higher PP. The greedy people fled and the ones who wish to remain relevant are sticking it out. The banks are also aware of this and are raising or simply not lowering reserve prices. There is alot more to say on this subject but what I will say is this: Don’t go into flipping if you think its easy. Its not. Don’t go into flipping if you need to put bread on the table now. Get a regular job until you know your way around. Don’t bite off more than you can chew.

  4. I’m a seasoned flipper, if you are a flipper then you probably know who I am, and I couldn’t agree more.
    The industry has taken a turn due to many reasons, and it’s a cycle, it will be back one day, but to try to get someone into this business now is not for that persons good

    PS. I have gotten more then 10 Yiden into this business In the last, I tell whoever asks me now, “it’s not the season for this now”

  5. My poor newbie chaveirim are sitting with overvalued fixer uppers. Please use extreme caution in this market. Prices are falling while interest rates are rising.

  6. Introducing new ppl to flipping now is a risky business. I have been in the flipping business for 4 years. as the writer describes, the sales prices have been flat for a year and the buying prices have been escalating to a point that it don’t make sense anymore. The rising sales prices had bailed me out in the beginning when I was new and didn’t know how to account for all costs properly. Even if I overspent on construction, I ended up getting more than expected on the sale. That luxury is gone with flat sales prices, so if you miscalculate the costs and timing you have a problem. foreclosures are the most overpriced houses on the market. one main reason its getting almost impossible to find anything to buy is the wholesalers who grab every decent priced house and flip it to a newbie who don’t understand numbers and hidden costs and they will make little no money but they kill it for anyone else. after doing about 8-10 a year in the past few years, I have bought just 1 flip in the last year. I have been focusing on other aspects of real estate. There are still opportunities out there but they require more work and more creativity. Building from ground up is a safer bet as the costs are more easy to figure out ahead of time. Requires more time and skills, not the quick buck, but a good option for those willing to work a little harder. Small multi-family is a decent option. hard to find, but not impossible. My advice to new ppl. don’t buy something unless it makes sense with the current sale prices. Don’t listen to the ppl telling you “in a year it will be worth much more” if the sales price of today don’t make the deal make sense, don’t buy it.

  7. Great letter and even better commentary. As one who owns quite a few rentals I have never been interested in “fix and flip”. The market for that is definitely yesterday’s news.

    Long term wealth can always be found in rental income so long as one does their due diligence. Again, great writing from all!

    • You can find long term wealth in rental income depending on the situation and location. it is very hard to find any property in the vicinity that you purchase and rent with any ROI. You also need to be able to cover expenses in-between renters when properties aren’t producing any income and need money to fix up for the next tenant.

      This is particularly true if you only own a few properties. You can have a couple of those properties vacant at the same time, and need to have funds be able to cover. Also if you do have say 10% profit margin from rent over mortgage, if you have the property vacant for just month, you are facing a loss for the year.

      If you are already wealthy, then holding and renting property long term can be a good long term investment. Your equity will rise, while you pay down the mortgage and accumulate wealth, but then, you have to be willing to deal with being a landlord, and all that is involved, unless you can find, and afford to pay a property manager.

  8. I disagree. There is alot of room for Yidden to wholesale real estate now, albeit NOT in New Jersey. You need to get out of the Daled Amos of NY and Lakewood and there is opportunity.There are plenty of seasoned investors who want rental properties which can be wholesaler instead of flips. Yes, the real estate market has slowed in the past year but it just takes a bit of creativity.Real estate is a Brachah that many Yidden can benefit from especially considering the major expenses we Frum Yidden have. It just needs to be gone into with guidance and mentoring.

  9. I disagree about the wholesale part. Some of them are happy to make $10-$15k, just as a finders fee. But I really dont know how ppl lose so much money. Before you buy you MUST find a local honest broker that can give you a ballpark ARV (after repair value) and a contractor with honest repair costs. Factor in some extra for miscellaneous, minus 5% of the sell price for the selling broker, do the math and figure it out. Yes, you can still get caught in a crash but theres no crash now.
    Hatzlocha Rabbah !!

  10. I appreciate all the feedback and comments.
    I never intended to suggest that wholesalers are bad people.
    Seasoned Flippers do not need my advise.
    I only penned this to warn Newbies.

    My advice for Newbies is to remember
    Hard Money borrowing is your biggest enemy
    Be very careful when buying off a wholesalers as many of them are willfully misleading newbies

    Wholesalers have a shortlist of investors that they send the good deals to. If you are a newbie you are probably not on that list. If you got a “so called deal” sent to you. It has probably been rejected by the seasoned investors and determined as JUNK. Proceed with caution

    May Hashem give all yidden a lots of parnosa

  11. The issue is that the wholesaler is not taking the risk, so he is usually missing some important details that Are s significant impact in the ARV (shared driveway,main road, across intersections, close to a commercial)
    The wholesaled got the property after competing against a group of professionals (either at the Sherriff or on the online actions) and its already at a number that didn’t make sense to the professional, so how will you put another 10 to 20 thousand.
    I did over 50 flips and i analyzed thousands of properties, I hardly found a good deal at a wholesaler.
    What I did found is a lot of people struggling with properties that they got from wholesalers.

  12. I am pleasantly surprised that this article is being circulated.I to am a seasoned long term rehab investor,that was very concerned by the recent seminar given regarding fix and flips.
    I actually contacted one of the founding partners of Riverside Abstract before the seminar,and sent him an email explaining why it was a mistake.
    To his credit this very fine individual called me back,(as I provided my real name and phone number.When you contact someone and give constructive criticism, if you don’t identify yourself, you are just a nasty person.However, this isn’t a letter to an individual,and I can remain anonymous).
    We had a long animated discussion about the pitfalls,and we agreed to disagree,but he assured me that there would be strong warnings to the public to be made aware that many lose money in this business.

    Below is the email I sent him.

    Dear *****

    We met a few a few months back when you did the title for me on the refi in ********.
    I keep getting emails from Riverside regarding a “fix and flip”seminar.
    I have been doing this for over 15 years,and have done over *** in that period.
    Currently I am doing ** in different locations in NJ.
    I am concerned that I see young guys getting into it,paying very high interest ,and coming up with a lot of issues that they had not anticipated,and getting badly hurt.
    I have had many good outcomes,and a nice number of very bad ones.As anyone knows,you can”t hit *** home runs,and there will be strikeouts.
    I am concerned that this isn’t being properly explained.All of the vendors will will make money along the way,but most of these guys won’t make a lot.
    Please have real people that have done this many times,share many bad outcomes.
    I am not trying to scare away competition,I’m really slowing down,the business has changed,and it isn’t as lucrative anymore.
    I feel this isn’t really a business,it’s something to do on the side,and it’s really for a person a little wild,not totally stable.I am such a person,but most people are not.It’s really not for the masses.
    As far as the T.V. shows fix and flips are concerned.I have long come to the conclusion that a lot of it isn’t real.It’s just enough drama and problems to make the show interesting,but not enough to scare you away.
    I would caution you to tread very carefully.and not project to the masses that it’s difficult,but with proper DD,you can do well.That’s simply not true.It is essentially borderline gambling,and I have seen dozens of blowups,many with a lot of money behind them.I honestly can’t believe I lasted this long.
    I can be reached at my cell ************* to continue this conversation,if you are interested.

    My real name

    As I mentioned earlier,I got a call back,and had a long animated discussion,where we agreed on some points,and agreed to disagree on others.I followed up that conversation with another email,which I am providing below.

    Dear *****

    I have discussed this with other people that have experience in the field,but are no longer involved.Some did better than others,but they all agreed that this will do more harm than good,over all.
    They particularly agreed that hard money SHOULD NOT be introduced at all.and definitely EXCLUDE any hard money lenders from attending,and it goes without saying NOT letting them present or speak.
    You wouldn’t give your car keys to your seventeen year old to drive in the Catskills at night with his friends even though he has a license,because he isn’t that disciplined,or aware of the inherent risks that he needs to protect himself from,no matter how good a boy he is.
    This is the same thing,and the fact
    that they are older than seventeen,married,have gotten investors,family money,or unfortunately,hard money,to purchase properties,doesn’t change much
    I want to explain a little more my grim 90% number of people that exit the business.
    Not all of them lose money.
    However,about 90% leave the business,and in hindsight would have never done it,had they known the outcome..
    At least 40-50% actually lose money.For a variety of reasons,beyond the scope of this email.
    The rest of them that leave,don’t make enough to make it worth staying in the business.Either the investor that is backing them pulls the plug,since he didn’t make what he thought he would,or they pullout,because what they make isn’t worth it,for all the trouble,risk and stress, once they payoff their hard money loan,or get their share from the investor.
    Everyone I spoke to told me to speak at the event and explain this well.(Aside to the reader,during my discussion with the individual I emailed, he also suggested I speak at the event,I declined).
    I responded that if I would have gone to such a seminar 15 years ago,and someone had said this,once I found out he was in the business,I would have said he wants to keep competition away.So the guys there will think the same.
    The rest of the email was a personal story which I won’t share.

    Unfortunately I feel my worst fears are being confirmed.I have gotten reports that there was a very large turnout of new investors,and a heavy representation of hard money lenders.
    There was a disclaimer,in the beginning, to be aware that you can lose money in this business,and you must be careful and do proper due diligence.
    It would seem that my words at least bore fruit in this token disclaimer.
    However,I have been doing this for 15 years,and have watched many people strike out.Jews and non Jews.As I said earlier,it may sound haughty ,but it’s true,it is not for the masses,you need to be a certain type of personality,it is a very rare fit.So the fact that so many came away excited,and ready to give it a shot,makes me concerned.
    Even the seventeen year old driving in the Catskills at night,had a drivers ED course, but a few hours at a public event isn’t even preparation,and the hard money lenders are similar ti driving while a little high.Good luck to our new drivers,let’s all daven for them,because they will need it.

  13. Yisroel Ahava: I quote: I feel this [flipping] is something to do on the side. Seriously??!! No. No. And no again. This is not a side gig. Saying such a thing leads me to believe that you didn’t in fact do even one flip. This is real. This is no side gig. Combined with a rental portfolio to create steady cash flow and this is a very healthy business. When I went into real estate some years ago, I met with almost every big real estate personality in the tri-state area. Every single one of them without fail told me that their first real estate deal was a single-family flip. Flipping is a entry level position in the world of real estate. Be careful be diligent and be patient-you’ll make it.

  14. A successful idea used in my area is to buy a house on a large lot, obtain zoning to split it into two lots, build a new house on the second lot and then sell both houses, having paid for only one lot.

  15. Yisroel Ahava:Your disclaimers that this is risky in general ARE important to publicize, however you are coming across all doom and gloom. The fact is what really needs to be publicized is that Flipping is NOT the only method to make money in real estate. In fact flipping is the most risky and maybe that should be the basis of the disclaimers,but also following up with the many other ways ,with Hashem’s Berachah and Tefillah, that ppl are making $ in RE

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