First-timers acquiring a fixer-upper often face foreclosure
A few years ago, a client of Cambridge real estate consultant Paul Martinez saw a two-family Somerville house as a prime chance at a second income.
The 30-year-old novice investor had seen “flipping” on reality shows dozens of times: Just buy a fixer-upper, renovate, convert to condos and sell in a month.
But 18 months later, this buyer was learning to tile and wire. He purchased at the top of the market and had run out of money on the brink of the housing slump, and the condos sat on a deflated market - overpriced by $60,000.
Before long, foreclosure loomed.
“People see these shows on HGTV and think they can flip,” said Martinez. “They don’t have the contacts or the knowledge to recognize they’re getting false numbers.”
Bravo’s “Flipping Out,” premiering Tuesday, joins a roster of “house-flip” shows, including A&E’s “Flip This House,” and The Learning Channel’s “Property Ladder.” But despite what you see on TV, real estate investing is not a guaranteed second income.
Emerging from the woodwork are first-time flippers who end up losing money, or worse, facing foreclosure.
Between the first quarter of 2006 and 2007, foreclosures increased in Massachusetts by a record 75 percent, 83 percent in Suffolk County alone, according to ForeclosuresMass.com, which provides foreclosure data to investors. The number of unconventional mortgages soared as well.
“A year and a half ago, when the market was racing, a lot of first-timers tried to flip and never sold. They might have bought into a loan that was escalating too quickly or gotten trapped by over-investing in a moderate neighborhood, and now more than a few are stuck,” said Paul Turcotte, broker and owner of Re/Max Destiny in Cambridge and on Newbury Street.
Realtors offer a “golden rule” for would-be flippers: Don’t buy unless you can afford a 20 percent variation on the property.
“Then, before you even lay your hands on a property, know who you’re selling to, and have an exit plan,” said Jeremy Shapiro, owner of ForeclosuresMass.com. “Draw the line on what you think you can do on your own, and make sure contractors are licensed. Know the laws.”
Those laws and regulations are changing though. The increasing number of foreclosures have made it more difficult for individuals without an adequate financial buffer to buy a new home.