Sunday, June 23, 2019

Flipping Nonsense

Trying to buy and sell Commodities and make a profit in the process is a business of margins.

A reader writes asking me what I think of a YouTube video that talks about buying and flipping cars. If you thought that buying and flipping houses was risky, buying and flipping cars is even more so, and the potential profits are even more infinitesimal.

The home flipping phenomena has always been popular in rising home markets.  When housing prices go berserk and increase by 20 to 30% a year as they did in 1989 and again in 2009 - and again in 2019 in certain markets, it's not hard to buy a house, hold it for a month or two, and then turn around and sell it at a tidy profit, regardless of whether you remodel it or not.

If you can find a distressed property or distressed buyer and purchase the property for cheap, you're all the better off.  And if you can dress up the house on the cheap so that it sells quickly, you can increase your profits even further. However, all of this is predicated on an endless supply of distressed properties, along with low-cost labor and upgrades, and an endless supply of people willing and able to buy the property at an inflated price at the other end of the transaction.

Eventually you run out of chumps.  So then, you sell the "system" on how to flip houses, or star in a reality TeeVee show about it.   That's where the real money is, not in actually buying and selling houses.

Not a day goes by that I don't get a postcard or email from someone who is subscribed to one of these property flipper seminars, who wants to buy my condominium in Virginia and flip it for a quick profit. They're hoping I am fed up with owning the condominium and will sell it to them for $100,000 and they can repaint it and put in a new kitchen countertop, and sell it for $160,000.

But so far, I've declined their offers, mostly because the building is slated to be torn down in a few years and at that point the Condominium Association will just cut me a check without any Realtors fees involved.  I suppose if I was desperate for cash and needed to sell, I might take them up on their offer. And in any Market there are always people in that situation.  On the other hand, I think I would just call one of my Real Estate friends in Virginia and tell them to list it at an attractive price - if I wanted to unload it in a hurry.

I remember going to an estate sale in Virginia down the road for me and seeing a house that was in pretty bad shape.  Both the husband and wife were smokers and where they had removed the paintings from the walls you could see the pattern of nicotine stains.  Not surprisingly they both died of lung cancer.  Their children lived many States away and just wanted to unload the house and sold it very cheaply that weekend. Somebody cleaned up on that deal, but only after they cleaned up all the nicotine stains and made some pretty major repairs to the property.

A neighbor here on the island did the same thing, buying a house from a deceased elderly woman's estate.  Her children came to clean out the house and settle her affairs and since they lived on the other side of the country, they didn't want to mess around with trying to list the property or make improvements on it in order to get it to sell.  He made him a low-ball offer and they took it, thinking correctly that not having to wait months on end for the house to sell and not paying a 6% realtor commission was a pretty fair trade-off for a lower price.

My neighbor was lucky.  The local real estate agents (and there are only two) generally snatch up such bargains.   They are feet-on-the-ground and usually aware when a distressed property is going up for sale.   They tend to snag all the distressed property low-ball deals.  It is rare than an ordinary citizen snatches one, as my friend did.

(One reason we were able to get some low-ball distressed properties was that we had a friend who did foreclosures for Ford Finance, back when they did mortgages.  Mark ended up becoming a real estate agent, and as such, we had access back then to the MLS system (which was not online in those days) as well as a "heads up" to new listings and inside information about quick sales.   When you are on the short list of who to call when you want to unload a property, you can snag deals.   Unfortunately, once we left that area, we were no longer on that list.   Getting on that list isn't easy to do.)

My friend remodeled the house and put it on the market for more than a hundred thousand then he paid for it. Of course, he put quite a lot of money into it including a whole new kitchen and bathrooms as well as tearing out walls and doing some pretty major renovations.  But he still made some money at it - although it was a nice capital gains tax problem for him.   Nice work if you can get it.

On the other hand, it is a risk-taking venture, and if housing prices start to collapse, you could be the one holding the bag when all the music stops, as happened to a lot of people I know, back in 2009 or thereabouts. Back then, many people were buying and flipping new construction or mini-mansions , and ended up over-extended with no buyers and mortgage payments due.  So the idea that there is easy money in flipping things is overstated.  As the present real estate market starts to contract, particularly in what were formerly hot markets, you will see less and less house-flipping going on.

Of course the real money to be made - and safe money - is in telling other people how to flip houses. You've no doubt seen the billboards about "Buy Ugly Houses" - these people make a lot of money by selling a course on how to buy houses for cheap and then fix them up and sell them for more money. If you've read the preceding paragraphs I've just saved you $40,000 in tuition fees.  Because it's really not all that difficult or rocket science to buy something distressed and fix it up. The hard part is just finding these distressed properties, particularly when there's a lot of competition for them.

But selling the idea of house-flipping is far more profitable and a lot less risky. You charge people for the seminars and instruction materials and it's all pure profit.  You don't risk any money in the housing market or have to seek out these distressed properties to buy.

"But Bob, you made money buying and selling houses, right?"   Wrong.  We made money buying and renting out houses, taking generous depreciation deductions, and then selling them years later.   We never bought into the idea that you could take a property and make quick profits from it, because it is very hard to do that, and just as easy to make quick losses as well.   There is a differences between investing in real estate and speculating in real estate.  The television and shows like "property twins" promote the latter.  And speculating is not investing.

Getting back to flipping itself, is there money to be made in flipping cars?  Well it is possible to make tens of thousands of dollars and buying and selling a house, simply because they're very expensive items to begin with.  But buying and selling cars is a much more marginal business, unless you are flipping million-dollar exotics, which is a very risky business.  Not only that, you're competing with a legion of new- and used-car dealers who have far more acumen than you do as well as better resources.

This is not to say it can't be done - and the legions of small used car lots across the country are testament to this.  Small used car dealers go to auto auctions and buy the cars that the main dealers don't want.  Often these are cars that have some issues such as higher mileage or excessive wear. They fix them up and buff them, using in-house employees they pay very little.  They then put them on their car lot, which is usually in a bad neighborhood.  The way they're able to sell these cars for so much money as they offer easy-money financing to people with bad credit.  People with bad credit usually don't have much common sense, and they will sign on the dotted line in order to get a shiny car.  It doesn't bother them that the car has 250,000 miles on it, or that they paid over book value for it, because they don't realize these things are important.

But below that level are there real bottom-feeders - the curbstoners.  These are people who often don't have auto dealer licenses and instead buy and sell cars from individuals trying to eke out small profits in the margin.  You can always tell if you're buying from a curbstoner, as when they sign over the title to you, the title is not in their name but in the previous owner's name.  They bought the car from someone else and then sold it to you and didn't bother titling it, because they would have to pay the title tax and fees, which wouldn't have negated most of their profits in the sale.

As I noted before, we used to have an impromptu used car lot at the local grocery store where I lived in Virginia.  People put their cars out on the lot and put a for sale sign on them.  On any given weekend there were three or four cars out there, maybe as many as a half-dozen, for sale.  I've actually bought and sold a couple of cars there.  The local Car Dealers Association threatened the strip mall owner with fines, arguing that they were acting as a car dealer by having more than four cars on their parking lot for sale at one time.  Of course the strip mall owner wasn't selling the cars, it was local people.  And if this is against the law, one wonders whether it's legal to even have a "for sale" sign in your car, because if you park in a parking lot and there's more than three other cars there with similar signs, they can tow your car away.  The car dealers were trying to argue they were protecting the consumer, but what they were really doing is protecting their own interests.

Anyway, one weekend there was a beautiful 1992 BMW 318i for sale. It was a Boston Green (Bonstongrun) two-door coupe with a sunroof and a brand new 4 cylinder engine. BMW had problems with the profile gaskets leaking in the cooling system and the engine had overheated. The lady who owned it was a flight attendant and she paid to have a new motor put in, so the car was in pretty good shape and quite a good deal. She wanted about $3,000 for it as I recall.

Mark and I vacillated on whether we wanted such a car, and we finally called her, she told us she sold it to a gentleman for $2,000 the day before. The gentleman in question was a man I call "Lois Price."  He was an Indian gentleman, and whenever you put your car in the paper or out in the parking lot for sale, he would call you up on the phone and scream, "What is your lowest price! What is your lowest price!"   And if you replied with your asking price, he would scream at you some more.

Apparently his high-pressure buying technique worked with some sellers.  Many people have a lot of anxiety over selling their cars and often let them go for cheap, because they're afraid they're never going to sell ever, ever, ever, forever, amen.  I ran into this when I sold my truck recently, as people would call me and tell me it was overpriced,  I would never get what I was asking for for it, and would I sold to them for $5,000?  However it did sell within a week and I did get my price, which actually was a very fair price, below book value.  No doubt, the people haranguing me on the phone were probably curbstoners.

And yes, in a few instances, I have been able to buy a car and sell it for more than I paid for it. I recounted before how a friend of mine wanted to unload his 1981 Mazda GLC for $500. The car wasn't in bad shape and actually had pretty low miles. The clear coat has started to peel off the paint is it was parked next to an industrial chemical plant. The driver side door handle didn't work and the four way flashers and turn signals were broken. The alternator light was on and he was convinced that it needed an expensive new alternator which the dealer wanted well over $100 for.    He was tired of climbing over the passenger seat and stick shift to get into the car and also worried it would not pass New York state inspection.

I fixed the door handle using some old carburetor linkage off a Chevrolet.  One of the plastic clips on the door handle linkage had broken.  And I found out that the turn signal problem and alternator light problem where result of him trying to use an American flasher module in place of the original Mazda part.  I had to get the original Mazda part from the Mazda dealer, and I recall it cost an astounding $100 at the time.  But once I plugged it in, the car ran perfectly.

By the way, that is the key to "flipping" car, if you can do it at all - you have to be handy and be able to fix minor things like this without having to hire a mechanic.  It is the same as house-flipping - if you have to hire out all the work, well, odds are, you aren't going to make much money.

I drove it for about a year and then sold it for $1,000 to a young couple who are graduate students at Syracuse University. They were happy to get a low mileage used car that was reliable and good on gas. I was happy to make a little money to pay for my last semester's tuition.

But such things are the exception, not the norm. You have to find a buyer who thinks his car is a piece of crap and wants to unload it as quickly as possible.  And then you have to clean it up and fix minor things and then market it.  And even then, all you're going to make us a few hundred dollars, if that.

If you can do this over and over again, over time you might make a few thousand dollars.  Moreover, if you are a very astute, you can buy a used car from a distressed owner, fix it up and drive it for a year and then turn around and sell it for more than you paid for it.  Thus, unlike the vast bulk of humanity who buys cars and sells them for less as they depreciate, you can be the guy coming out ahead of the curve.  Nice work if you can get it.

But of course, this becomes a full-time job. You constantly have to scan the classified ads looking for under appreciated vehicles and know the market very well as to what market values are and what vehicles are popular.   You also have to be comfortable with taking advantage of people as well.  You have to become Lois Price and scream at people on the phone and generally behave like, well, a used car dealer, and we all know what nice people those are.  And not all of us are cut out to be so heartless and calculating.

For example, there was a lady here on the island, as Ireported before, who had her son's Nissan parked in the front yard.  The boy died at a very early age, and the mother was distraught.  Rather than selling the car, she let it sit in the driveway for almost three years until the tires were flat. It wasn't in bad shape, but it wasn't in great shape either.  One fender was badly repainted and it had some pretty bad seat covers on it.

She told me that she liked seeing the car in the driveway because it made her feel like her son was going to come home any day now.  But after several years she realized this was taking an emotional toll on her and wanted to get rid of it in a hurry.  She would have sold it for a pittance at that point.  And if I felt I wanted to take advantage of a grieving mother, I could have bought it for nearly nothing.

With a little R&R I could have sold it doubled my money, but of course that means making $1,000 which isn't really all that much money these days.   At the time, I was leaving for vacation, did you want to buy the car and have it sit in my driveway for several months.  Also I felt kind of uneasy taking advantage of this lady. And moreover there was probably somebody in the surrounding community, which is rather impoverished, who could make better use of the vehicle for their own personal transportation.  So I walked away from the deal.

Deals like that are out there - you want to take advantage of grieving mothers?   Go right ahead.

In the realm of exotic cars, it gets more difficult.   Sure, you can find a "distressed" exotic that maybe was in a wreck or wasn't taken care of.  You can fix the problems with it like Hoovie on YouTube does.  But in the rarefied air of exotic cars, the provenance of the vehicle is all-so-important.  If you don't have complete service records, it is harder to sell the car.  And a high-mileage exotic that has been a major wreck will never be collectible, unless it was driven by Steve McQueen.   In Florida and Las Vegas and other tacky places, you see "exotic car" dealers, who have showrooms full of fancy cars.  Some of them are real gems, some of them are real fright pigs.   None are very attractively priced.   But then again, they only have to sell one or two a month to make a profit - so long as the supply of fools is never-ending, they stay in business.

So could you buy and flip vehicles for Fun and Profit?  Sure, just you can buy and flip any commodity and make money.  But the buying and selling of commodities is a marginal business, mostly because other people are already in the business and therefore there's a race to the bottom in terms of profits.  MLM schemes and schemes about selling things on Amazon and whatnot all fall under the same category.  Yes you can buy things locally and flip them and sell them on eBay and make a small profit. B ut you have to be lucky enough to find things to buy that you know will sell for more money, and even then, it's a lot of work for not a lot of profit.

I recounted before the lady in Maine who went and bought clothing at a local discount store and put it on eBay.  She would mark up everything 20% and if it didn't sell after a few weeks, she would take it back to the store for a full refund.  Yes it was profitable, but yes it was also a lot of work to go to the store and buy these things package them up, list them on eBay, take pictures, sell them, and ship them.  Nobody was handing her free cash - she had to work for it.

Similarly, these systems for selling things on Amazon often fall down because they require the seller to purchase products in advance and front the money.  If the product doesn't sell, you can lose your shirt.  Also, Amazon is cutting back on the number of small retailers that use Amazon as a fulfillment center.  Quite frankly, Amazon's not making money on these transactions and so they're just shutting the whole thing down.

Whenever someone tries to get you into an enterprise that's base d on buying something and turning around and selling it at a higher price, you should be skeptical. Whether it is soaps and lotions in an MLM scheme, or gold or Bitcoin or whatever, you're basically trading commodities. And trading commodities is not only risky, but the margins can be razor-thin.  Sure, every once in a while somebody makes an awful lot of money when some commodity shoots way up in value, but usually that's unexpected.   And those big wins are usually well-publicized, just as the guy who wins big at the casino or the lottery is well-publicized.   The losers are never discussed.

Being a merchant is not an easy business.  Sure, Walmart makes a lot of money at it, but they're the largest retailer in the world, with thousands of stores and the buying power to crush suppliers and lower their purchase prices.  Plus, they have name-brand recognition and exposure to hundreds of millions of customers.  As an individual you have none of that.

Unless you want to make a career out of being a merchant, I would leave the merchandising to the merchants.  Because the profits just aren't there and it is an awful lot of work.  There is no free money.

On the other hand, if you want a sure-fire way to make money, sell the idea of making money, flipping houses, flipping cars, losing weight, or selling soap.  Because that's where the real money is, without all the attendant risk.