Speculation

What it is

I call this riding the wave. Here’s how it works. You buy a house and you do a renovation. The market is going up while you’re doing the project. You sell for more than you paid plus your renovation costs, and you book the gain. You think you made money because of your flipping skills. But when you strip out the appreciation that happened while you were holding, the deal might have actually lost money. The market carried you. You rode the wave.

The wave is a great thing — it’s like a wind at your back. But you should not plan on it and you should not fool yourself that it’s your skill.

Forced appreciation is the opposite. That’s the value you create with your own work: buy below value, renovate to the baseline of the comp range, create equity through the renovation itself. The deal works whether the market goes up, sideways, or down. Market appreciation, if it happens, is icing. Never the cake.

Why it matters

I went through this on a bunch of early flips. I was like, man, I’m making all kinds of money. Now when I look back in hindsight, I didn’t make any money because of my great flipping skills. I made money because it took me so dang long to do the flip that the market carried me up. And I didn’t understand the difference at the time.

The way people get wrecked in a housing correction is usually not that they were doing bad work. It’s that they were speculating without knowing it. They thought they were flipping. They were actually holding a market-timed bet dressed up as a renovation. In 2008, the operators who had real equity gaps on their deals survived. The operators who relied on the wave got wiped.

The test is simple: would the deal still work if the market stayed flat from the day you signed the contract to the day you sold? If yes, you’re investing. If no, you’re speculating.

There’s a version of this that’s especially easy to miss with A-class neighborhoods. New flipper sees a house in an appreciating neighborhood, buys close to list, does cosmetic work, resells six months later at a 15% premium. They book the gain as flipping skill. 14% of that 15% was the market. Their actual forced appreciation was 1%, which after costs is a loss. They just don’t know it yet.

How it shows up

The HGTV cast did this on a flip I watched. They were all in at about $800K on a house they thought they could sell for close to the same, but then the market ran up hard over seven months while they were renovating. They sold for $1.175M. They said it was because they did great work. The market saved them. They barely acknowledged it. I call it the wave and I try to be honest about it — when I made money on a flip in that period, was it my skills or was it the wave? You have to be honest with yourself about that.

The gentrifier trap is the other version. Pushing a house past the top of the range of comps on the assumption the neighborhood is transitioning. Sometimes it is. Often it isn’t, and the house sits on market for months because the buyers who could afford list price don’t want to live in that zip code yet. That’s speculation dressed up as a vision play.

Related

market appreciation, forced appreciation, equity gap, four false profits, range of comps, over renovating