Transcripts

Getting Real About The State of House Flipping

SUSIE GHARIB: As you know, property prices have been climbing nationwide for years now. And while many people are just getting a foothold on the housing ladder, others are trying to climb it quickly. "Flipping," which is buying property then selling it quickly for a fast profit, or just moving up into a bigger house might be an investment gold mine or it might not. As our home economist Brett Graff says, the old saying "buyer beware" applies more now than ever.

BRETT GRAFF, NIGHTLY BUSINESS REPORT CORRESPONDENT: A lot of homeowners are smug about their property values, confident their houses will sell for considerably more than they paid. What owners should remember is that making a lot of money on your home can actually be quite expensive. The obvious way to get cash from your house is to sell it. Then you`ll need somewhere else to live. Shop in the same market and you can bet other sellers will be looking to make a bundle, too. Even a lateral move will set you back by the amount of the selling costs, including special assessments, broker commissions, taxes and attorney`s fees. OK, so you downsize. If you bought your original home for $200,000, sell it for $400,000 and buy the new one for $300,000, you might find a big portion of your profit going toward increased property taxes, because those taxes are based on the purchase price.

JOAN MCCAUGHAN, REALTOR, COLDWELL BANKER: In some instances, your taxes are double what they were for the previous owner, double. And not only that, then there`s the insurance effect with these years, past several years the insurance in some instances has gone up 50 percent. So that`s also a sticker shock for a lot of buyers.

GRAFF: Under the current tax law, single people can take tax free $250,000 of profit when they sell their primary residence. Married people can take $500,000. Use your profits to get a bigger mortgage and a more expensive house and you still may see a hike in monthly expenses.

LILY BLITSTIEN, CHASE HOME FINANCE: Everyone is trying to get in. Everyone wants to be the savvy buyer, the one who knows how to. And you have to count the risks. You have to learn from what happened in the past.

GRAFF: A second way to get cash from your house: stay put and take advantage of today`s low interest rates by getting a home equity loan. With the cash in hand, you can invest in your current home, a second home, the stock market, or really, whatever you want. But remember, if market values drop, you could wind up owing the bank more than your house is worth, or, worse, you could lose it. Home equity loans are not risk-free.

MCCAUGHAN: First of all, if it`s a fixed interest rate, OK. But half of these and more than half of these are now adjustables and they will go up and they do go up and people don`t always allow for that. And of course, as we`ve already said, the taxes are going up.

GRAFF: Certainly, buying the right property is the investment of a lifetime, literally. In addition to its -- cross your fingers -- financial appreciation, it`s where you eat, sleep and make your home. But in most markets, you can`t depend solely on the house you live in to make you rich, at least not without also employing a concrete real estate investment strategy. And even if you`ve got one, well, like every other speculation, there are no guarantees. Brett Graff, NIGHTLY BUSINESS REPORT home economist.