I’m sitting in a hotel ballroom listening to a pitch I can scarcely believe: Earn $70,000 or $80,000 a year in your spare time. Much more, if you plunge in full-time. Working at your own pace. From home. Without a boss.
If this were a seminar for investment banking or cutting-edge coding or even drug-running, it might seem plausible. But the instructor, Rodney Huffman, who works for a company called Fortune Builders, is trying to persuade 150 or so dreamers to embrace a new life of financial freedom by flipping houses and dabbling in other forms of real-estate investing. I check my smartphone. Yes, this is 2014, not 2004. Is flipping really a thing? All over again?
Flipping houses, of course, became American’s favorite hobby during the real estate bubble that was approaching full swell a decade ago. Back then, flippers could ply their trade by buying homes with borrowed money, doing practically nothing to the property and reselling for a profit a few months later, simply because prices rose like helium month after month.
It worked for a while, until the bubble burst, prices plunged and careless speculators were the ones who got flipped—onto their backs. Many flippers limped to the sidelines or got out of the game entirely. But flippers began to reemerge around 2010, after home values had plunged and were close to bottoming out.
The new rules of house flipping
Flippers are now back in force, it turns out--but the rules have changed. Lenders no longer issue flaky loans to suspect buyers with a tiny down payment, which has chased dabblers out of the market. Since home prices no longer defy gravity, the only real way to profit on a flip is to find a distressed property at a fire-sale price and quickly make improvements that add value. Then, pray for a buyer who’s able to qualify for a mortgage. The new rules favor cash buyers and institutional investors—usually able to negotiate the lowest prices—and established real-estate pros with intimate knowledge of local conditions.
But is flipping really safe for the little guy? Can ordinary people make money at it without getting in over their heads? Fortune Builders makes it sound that way, and a proliferation of TV shows such as “Flip This House,” "Flipping Out” and “Flipping Vegas” typically feature uplifting yarns about novices jumping into real estate and coming out ahead. So after hearing Rodney Huffman’s investing advice during a two-hour seminar in a New York hotel, I decided to find out if flipping is a smart way to invest time and money. Often, a lot of money.
Fortune Builders, the company sponsoring the free two-hour seminar, was founded in 2006 by Than Merrill, one of the regular personalities on “Flip This House,” which ran for five seasons on A&E and is now in syndication. It's not the only real-estate "guru program," as such outfits are sometimes called, but it's one of the most prominent, thanks to hard-to-miss radio ads that typically air when the company is coming to town to run its free workshops. In the ads, Merrill introduces himself as the “star of A&E’s hit TV show, ‘Flip This House'" and goes on to say he’s looking for a “handful of people who want to consistently make a lot of money, per deal, in your spare time, without using any of your own money.” One amused listener set Merrill’s script to animation featuring SpongeBob SquarePants.
What the ads don’t say is that the workshop is really a pitch for another event—this one lasting three days—that costs $197 and includes a free guest, if you choose to bring one. When I heard that, I began researching Fortune Builders and learned that the three-day seminar involves a lot of arm-twisting to pony up for “mastery” courses that cost anywhere from a few thousand dollars to $33,997. And if you go that far, there are further “inner circle” programs on real-estate investing that cost thousands more.
There’s a bristling debate on sites such as Yelp, Ripoff Report and BiggerPockets over whether Fortune Builders is a bona fide educational outfit or a glorified scam. “I feel I was very misled,” says one Fortune Builders alumnus who borrowed money and maxed out his credit cards to enroll in the most expensive program two years ago. “They made it sound like it would be the kind of mentorship everyone is looking for. But the coaching was really just a once-a-week coaching call for 30 minutes each time.” Of 80 or so people who joined the same full-immersion program, this customer says, he’s only aware of 6 or 7 still involved in real-estate investing. The rest lost interest or couldn't cut it.
The cost of 'starting a business'
Patrick Jacques of Orlando, who's 31, attended the $197 seminar with his father earlier this year and blanched at the fees for the mastery programs. “Why not spend that money on a property?” he reasoned. Both he and his father declined to sign up for the costlier courses, but Jacques says a Fortune Builders rep called his father several times after the seminar, imploring him to sign up. When his father said he didn’t have the money, the rep suggested he put the fee on a credit card, and ask the bank to raise his credit limit if necessary. That pitch didn’t work, yet other attendees also report that Fortune Builders reps encourage them to use credit cards to pay for programs, regardless of interest rates that are typically in the double-digits. Most consumer-finance advocates, by contrast, say putting nonessential charges on a credit card is a terrible financial move that can lead to years of onerous debt, tank your credit rating and even cause bankruptcy.
Merrill gained his investing know-how at a real-estate firm called CT Homes that he started in 2003, which helped get him onto “Flip this House” for three seasons, starting in 2007. Around that time, he started Fortune Builders as a way to capitalize on the exposure brought by the show and scout for opportunities he could invest in nationwide as a private lender. Merrill won't provide revenue or profit numbers for Fortune Builders, which is privately owned, but he says it’s profitable. The company employs about 250 full- and part-time workers.
Fortune Builders asks people who complete its three-day, $197 seminar to rate the program from 1 to 10, and Merrill says the average score on the internal surveys is about 9.5. And he likens the use of credit to finance the programs to the kind of investment typical of any start-up. “I believe wholeheartedly in the value of utilizing credit,” he tells me in the video above. “You’re starting a business and you’re going to have to use credit to do that.”
Fortune Builders has its defenders, including many who argue that the company's detractors are often people who expect easy money whether they’re promised that or not. “I’ve talked some people out of doing stuff like this, because I knew they wouldn’t have the discipline to do what was going to be required,” says Paul Chapman, 59, of Walnut Creek, Calif. He spent about $40,000 on Fortune Builders training in 2011 and says it helped him build a business that has earned $1.3 million flipping 20 properties since then.
No easy money
At the two-hour seminar in New York, instructor Rodney Huffman was upfront about the risks of investing in real estate. “How much money can you lose?” he asked the crowd, then answered his own question: “All of it, and then some.” Yet he also ticked off several tantalizing ways to make money that are far more complex than ordinary investors may realize, such as real-estate wholesaling, reverse wholesaling, and investing in tax liens.
Huffman also told the crowd: “If you’re just getting started, it’s a great time to start. Experts are saying we have not seen a better time to load up on these types of sales since the Great Depression.”
But a lot of other experts disagree. In its latest quarterly house-flipping report, research firm RealtyTrac says there’s still vigorous flipping activity in markets such as Miami, Los Angeles, Phoenix and New York, with the gross profit on a flip averaging about $76,000 nationwide, before accounting for rehab costs and other expenses. But the profitability of deals peaked in the second quarter of 2013 and flipping is getting tougher. The average flip takes 185 days, up from 133 days a year ago. Distressed properties best suited for flipping are getting harder to find, as the tidal wave of foreclosures that accompanied the housing bust recedes. Mom-and-pop flippers, meanwhile, now compete with Wall Street investors such as the Blackstone Group and other private-equity firms, especially in the market for lower-priced homes that can be fixed up and rented to typical families.
Seasoned pros are still able to make money. Will Barnard, a Los Angeles real-estate investor, says his eponymous firm earns more than $1 million per year flipping houses in Southern California. But to remain profitable, he has had to move up to pricey properties as institutional investors flooded into the market for lower-priced foreclosures. “The competition below $800,000 is ridiculous,” he says. “I needed to eliminate some of my competition. Not everyone can compete to buy a $2 million house.”
Barnard’s advice to beginner flippers: Devour books, start with something as small as a mobile home, find a mentor even if you have to work for them for free, and frequent networking sites such as BiggerPockets. “Stay away from guru programs,” he adds. “They make it sound as if money will fall from the sky. There is no easy money.”
Determined flippers might still be able to make a go of it, but they should probably start by understanding that the sweet spot for flipping has most likely passed. The real lesson of Fortune Builders, in fact, might be that selling people dreams is a more reliable business than investing in real estate. And if you’re a quick learner, that lesson is free.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.