House flipping

I'm sorry Chip and Joanna Gaines lied to you.

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We love Chip and Joanna Gaines - they’re cute, spunky, hard working folks. They’re an adorable couple, but sometimes we cringe at the real estate statements that come out of their mouths - and they are some of the better ones on HGTV. Chip and Joanna claim to “take the worst house in the best neighborhood, and turn it into our clients dream home,” and on its face, this sounds pretty good. In home valuation language they are trying to buy under improvements for the neighborhood, which are usually a good deal, and below market value, but then there is the second half. A “dream home'“ is often code for “over improvement for the neighborhood,” and typically see lower market values compared to their costs. With that said, lets look at some of the half truths and hidden land mines that you want to avoid if you’re following Chip and Joanna’s example.

  1. “Fixer-uppers” don’t usually qualify for financing.

    Its a rude awakening when you find your dream “fixer upper,” place your offer and then the bank comes back and informs you that the condition of the home won’t qualify for your loan. Lenders have minimum property requirements that a home must meet in order to secure financing. The short thing to remember here is: Is the home 1) Safe - are there obvious safety concerns that endanger inhabitants of the home, 2) Structurally Sound - is the home going to stick around for 30 years, or does it need a major structural overhaul, and 3) Can the property qualify for the particular type of loan you need (chipping and peeling paint will hold up a FHA/USDA/VA loan, etc). There are loans that can be used for fixer-uppers, but you need to know to ask for them: FHA 203k / FNMA/VA Renovation loans. These loans allow you to obtain quotes from contractors and take out a loan for the final total cost versus the final market value of the home once renovated.

  2. Cost does not equal value.

    “I’m going to buy a $20,000 home in a $30,000 neighborhood and put $50,000 into it! So, Chip and Joanna taught me that will add $50,000-$100,000 dollars, right?!

    No. That’s not how any of this works.

    You’ve priced your property out of the market, and unless a very foolish person comes in with $100,000 cash, you’ve probably thrown away nearly $40,000. The mantra that every renovator needs to memorize is “Cost does not equal value.” Its a simple and silly illustration, but it works: how much does a fourth full size pool add to value. Anyone can see that cost doesn’t equal value in this case, but it holds true across the board. In any renovation, you must keep in mind a few things to see the largest return on your investment:

    1. What is the high end of our market?

      This should help you set your maximum budget. If you bought your home for $50,000 and the highest sale in the last 3 years was $70,000, spending anything more than $20,000, even in all the right areas, is probably throwing money away.

    2. What is typical for my market?

      If your market expects 2 bathrooms, and you only have 1, then its probably wise to add a 2nd from a return on investment perspective. However, in the same neighborhood, its probably foolish to add a 4th. This is true of materials to, if the market expects laminate flooring, don’t expect a large return for marble.

  3. Fixing up a home is romantic - but where is the baby going to sleep?

    Drywall dust is a horrible thing for babies. Take into consideration what your life is going to be like during your dream renovation to ensure it doesn’t become a nightmare. Get a realistic plan and budget before you embark on the journey and then be prepared for adjustments. A contractor can help a great deal to tell you how much your dream project will cost - but an appraiser can tell you how much that dream will be worth, so it doesn’t become a nightmare.

  4. “Fixer-uppers” can quickly become “over-improvements.”

    As noted in this Realtor’s opinion of the market area of Waco Texas, these big beautiful homes that Chip and Joanne build have a hard time being sold for what they cost to build.

    https://www.yahoo.com/lifestyle/waco-realtor-reveals-big-problem-194513387.html

    Builders don’t make markets, buyers do. If there is no one willing to buy a home in a market for more than $250,000, then it doesn’t matter if you put $2,000,000 into it - the ceiling is $250,000. Barring a cash buyer with no knowledge of the area, you’re going to be eating crow and Ramen Noodles for a while.

  5. The Shotgun House

    This episode is so jam packed full of very bizarre real estate decisions/statements, that we need to comment. Lets walk down the list:

    1. They find a home that they are given… that doesn’t usually happen. Further, they are offered reclaimed materials for free… this doesn’t usually happen either.

    2. They move the home to a lot they’ve already purchased. This will make anything but a cash deal nearly impossible.

    3. The home they are given is 1 of 2 left in the city. In a city with a population of approximately 130,000, to have 1 of 2 of something is either very good, or very bad, and in the case of this one bed room home, its not looking good. In home valuation language this home “does not conform to the market” which would exclude it from some financing (even in perfect condition).

    4. At the end of the show they do some funny math, the cost of the lot + the cost of renovation = the value. We’re sure that Chip and Joanna didn’t mean to commit a violation of Texas Appraisal Procedures that could result in a fine, but when they used the word value, they did. Furthermore, this simplistic game of addition, is misleading to the buyer and the viewer. To put it simply, cost does not equal value.

    So what happened then? After a short time the owners, who were told that the house was worth approximately $140,000 attempted to sell it for $950,000, and it sat, and never sold.

    Shocker.

    However, we do want to bring in another interesting point. Zillow claims to have accurate home valuation tools (verbiage that they have been sued over), when you look at the numbers, you see is really more a shell game. In this case, they were consistent with that strategy. A look at the Zestimate history above reveals that Zillow grossly over estimated the land value by 250%. Then when the county assessed the home at approximately the cost of the purchase plus improvements, it simply mirrored the assessment (assessments are not appraisals, and are not good indicators of market value, but they have more credibility than Zillow). Then, when the house was listed for $950,000, the Zestimate shot up to $750,000, before retreating slowly over a year to a level 5-8% higher than before the listing.

    That is how Zillow claims “accuracy.” Their algorithm weights listings heavily assuming that agents have properly informed sellers, and then if the sale closes near that price, Zillow can claim accuracy. However, if the price is way off base and never closes, Zillow moves back to their old math and no comparison of accuracy can be made. So their data on their accuracy is incredibly skewed to act as if they are credible, when in fact, they are just piggy backing on agent’s accuracy (which is FAR better than Zillow).

A few closing thoughts:

  1. HGTV can give you some neat ideas to spruce up your home, but get a professional opinion on the big financial decisions. Builders don’t operate in the world of “value” but rather “cost.”

  2. Neither Chip or Joanna Gaines are licenced appraisers (per TALCB https://www.talcb.texas.gov/), yet they regularly offer the “market value” of the properties both before and after repairs. Per USPAP, this constitutes an appraisal. Per Texas TALCB rules, only an appraiser can perform an appraisal and performing an appraisal without a license can result in a fine of $1,500-$5,000 per time. Over 5 seasons, that brings their total potential liability to the Texas Appraiser Licensing and Certification Board to between $237,000-$790,000.

  3. Never, ever trust Zillow. https://sacramentoappraisalblog.com/2019/05/01/two-things-to-understand-about-zillows-accuracy-rate/

For more on this topic, read below:

https://www.fatherly.com/play/chip-and-joanna-gaines-use-hgtv-to-lie-to-middle-class-homebuyers/

https://birminghamappraisalblog.com/appraisal-tips/an-appraisers-take-on-the-fixer-upper-craze/

https://www.realtor.com/advice/home-improvement/lessons-i-learned-fixing-up-my-outdated-fixer-upper/