Shows like Flip or Flop make it look easy to turn huge profits from renovating a home. But what they don’t tell you might convince you to keep your day job.
Personally, I love watching the home renovation shows on HGTV. From tiny apartments to sprawling estates, all it takes is a minute or two of watching people muse on the potential of a dilapidated structure for me to be hooked. How will they make that fixer-upper look amazing?
Depending on the show, current homeowners may wish to renovate their house, or a “flipper” may buy a vacant property and completely renovate it with the intention of selling it for a profit. In either case, the owners always talk about their estimates of costs and profits before they start work and then update those figures after completing the project.
For instance, a flipper may say, “I can purchase this house for $70,000, and I expect to spend $60,000 on renovations, so I need to be able to sell it for at least $130,000.” They research the local market, and if they think they can sell the house for more than $130,000, they make the purchase and begin the repairs. At the end of the show, they will revisit their estimates. “We bought the house for $70,000; it only costs us $55,000 for the renovations, and now the current market value is $250,000!” If they were fortunate enough to sell their house for the asking price, they go through the numbers again and add, “We made a profit of $125,000!”
Accounting Profits vs. Economic Profits
After watching a run-down, outdated house be transformed into a modern, perfectly staged abode in the span of half an hour, I start to ask myself questions like, “Could I make this much flipping houses? Wouldn’t it be rewarding to turn ugly homes into something worthy of the cover of Sunset magazine?”
But then my economist brain switches on and other questions come to mind. “How many hours did they work on this renovation? What would that break down to in terms of an hourly wage?”
It’s tempting to add up all the explicit costs and benefits, like building materials, permits, and the selling price, to determine profits.]
What I’m really doing when I start to ask questions like these is assessing the project’s economic profit. It’s tempting to add up all the explicit costs and benefits, like building materials, permits, and the selling price, to determine profits. That calculation will leave us with what’s called an accounting profit. However, that figure ignores the implicit costs — how the resources employed in the project could have been used elsewhere (aka opportunity cost). These are the additional costs we must consider when determining economic profits.
Labor Costs and Opportunity Costs
One of the most commonly overlooked implicit costs in these types of shows is labor. I have yet to see a single episode where they address the cost of the labor that goes into completing the renovations. Often a couple of “amateurs” are brought on to help complete the renovations under the guidance of the show’s resident expert. Though it seems like they can work miracles in under an hour, the reality is that it takes hundreds of man-hours to complete the extensive projects presented on these shows.
Would it have been more profitable to raze the house completely and build something else?”]
What could these laborers have been doing instead? What would they have been paid to write computer programs, for instance? Taking a realistic hourly wage and multiplying it by the number of hours spent working on the project is one place to start in computing the economic profit. When the opportunity cost of labor is accounted for, the resulting profit will be much lower than the numbers quoted on these shows would lead one to believe. And of course, that’s only one implicit cost. Would it have been more profitable to raze the house completely and build something else?
So the next time you’re watching Flip or Flop and wondering if a career change is in order given the enormous profits to be had, take a more realistic approach and ask yourself how much someone would have to pay you to take on that job. While you’re at it, add in the cost of hiring someone to coach you through the renovation work and someone else to be the creative genius behind it all. That $125,000 profit may quickly disappear!