Flipping Real Estate
House flipping is, essentially buying a house with the intent to sell for a profit, but the logistics can get pretty complicated and why you need a renovation team. There’s a lot of decisions to make like where should you buy? If you purchase a house in an up-and-coming neighborhood, you’re banking on the neighborhood increasing in value. If all goes well, you could make a nice profit, but if something goes wrong — faulty budgeting, timing issues, a crime spike in a neighborhood you could be stuck with a house you can’t get rid of. Getting into this market isn’t for the faint at heart, but for those who have taken the time to understand the market, some have made a nice profit!
So much in property flipping depends on the real-estate market, which we all know is cyclical. During a boom, property flippers have the upper hand and can almost name their price in some areas. But during a slow period, many of these fixed-up homes can sit on the market much longer than expected. Creating a renovation team affords you the ability to not only search for that not so great homes but in a great neighborhood they introduce you to resources that help you accomplish your dreams of getting into this market.
Once you’ve determined where to buy, the next step is deciding on a property. I strongly recommend a single family dwelling in a moderately priced area. If you go for a fixer-upper, you’re committing to improving the home and that which takes time and money. If you buy a foreclosed property at auction or from a bank you could get a bargain, but most likely you’re going to will have to deal with.
Fixer-uppers and foreclosures are what most people think of when property flipping comes to mind. Created by the great real-estate bust of 2007 flippers could buy homes at pennies on the dollar; hold on to them for a few months to complete repairs and sale at a reasonable profit. So what is it like to flip houses in today’s market? And what does the average property investor need to know about flipping before investing? How much money can be made by flipping a house?
Buy Low Sale High and Don’t Over Improve
If you watch Flip This House on HGTV, it looks like everyone is flipping houses. “Flip This House” and “Flipping Las Vegas” are just a couple the come to mind, singing praises of buying a house and quickly selling it at a substantially higher price, but house-flipping is more like a basic investing lesson: Buy low, sell high. You want to find a property that is undervalued and in just bad enough shape that you can invest minimal time and money in it before selling it. There are people who have made careers out of buying distressed properties and quickly turning them around for a profit.
The first piece of advice that most property flipping experts give: Make a budget. While finding the perfect place and having a licensed general contractor is important, budgeting is where new flippers most often fail.
Stick to the basic rule of bargains: If an offer sounds too good to be true, it probably is. That goes for that perfect under priced bungalow, as well as knowing your team. Always ask for references from the team you’re creating, as well as vendors. Make sure your general contractor and vendor references are from clients whose work had been completed several years back to see how the job has held up and the customer service was after the job was done.
Also, be wary of Franken-houses — historic homes that have had additions and partial remodels done over time. These houses may require a complete wiring overhaul and can cause many unseen headaches. Moderately priced homes that have been foreclosed on and in need of cosmetic repairs appeal to a larger market of home buyers.
House Flipping Tips
If you’re planning to buy a relatively new home that need cosmetic updating, budgeting can be simple. It’s just like buying a home you actually plan to live in — you need to cover the mortgage, insurance, taxes, and a host of other fees associated with home ownership, and that’s about it. However, in a softening market, the supply of houses is much greater than demand, so you need to create lots of curb appeal. Don’t over doing it (look to your neighbors and other homes for sale) and keeping your design clean and neutral. If you’re working on a fixer-upper, the budget starts to grow when you consider the renovations you’ll need to make. According to most experts, you should add 20 percent to your estimate for the final cost. If you overestimate, you get a surprise windfall — but if you underestimate, you get stuck with unexpected bills.
Structural improvements — like plumbing, electrical, insulation, pest control, and HVAC — are typically the least sexy, but most important improvements a flipper can make. New hardwood floors and coat of paint may get buyers in the door, but a termite problem can kill a deal quickly.
I always advise fixing up the kitchen and bathrooms for the best return on your investment. This can include new cabinetry, counters, hardware, sinks, back splashes, appliances, floors and lighting. This sounds costly, but FNMA has created a special home financing program call the HomeStyle loan where a large percentage these improvements can be financed. Kitchen upgrades can be expensive, but they make a big impression (granite counter tops and wine storage, for example). You could also decide to go green, which can add value to the house when the improvements are marketed as money-savers. Obviously, you’ll keep costs down if the house is in good structural shape and just needs updated paint and carpets — but things can quickly get pricey.
I mentioned curb appeal earlier – the outside of the house. You might need to paint, landscape and fix up the driveway, which adds to the budget. If you’ve buy in a pricey neighborhood, mowing the lawn and repairing the fence may not be enough — there could be homeowners’ association fees and again just another reason why I recommend you look for homes in moderately priced neighborhoods.
You need to figure out the neighborhood. Don’t skimp on the research here. Make sure you really investigate the area – drive around during the day and at night and I’ll check recent sale prices and find out if any other flippers are sitting on empty houses.
If you’ve opted to buy a home in foreclosure, you’ll be buying from a lender — foreclosed homes are also known as REOs, or real estate owned by the lender. Purchasing an REO is a lengthy process, typically six to eight months. This is because for a bank to foreclose on a home, it must file court papers against the homeowner, which takes awhile. If it’s an auction, you’re ruled by that timetable. The best way to overcome this is to work with FNMA or HUD homes. These properties have already gone through the foreclosure process and you simply need to go house hunting at “The Home Buyer’s Korner”.
Budgets can balloon quickly on fixer-uppers. If you decide to invest in one, you need a high tolerance for risk — and an exit strategy. The consensus from most home remodeling experts is this:
- You can make more money on a really cheap house that you turn into a nice house than a nice house that you turn into a premium house. All those expensive upgrades don’t offer nearly as much return on your investment as fixing a cracked foundation does. I’ve found that I can negotiate a 20% to 30% discount on a foreclosed home for the cost of repairs and needed renovations as compared to other homes in the neighborhood. Therefore a crack slab although sounding severe really isn’t, if you know about these issue in the beginning. The more people you get involved, the more coordination is required and yet another reason why I strongly recommend a general contractor to help you work with them. You’ll have to keep very close tabs on plumbers, electricians and handymen and make sure they are all licensed by the State, meet your lenders requirements for hiring a crew, as well as come with good references.
- Don’t overestimate your work. Sure, that paint job looks nice, but is it really worth a $20,000 markup on the property? Overpricing your property could just leave you with a house that people are wary of because it’s been on the market too long.
- Don’t get ahead of yourself. First-time flippers may see dollar signs when they think about buying multiple properties, but problems can quickly turn into bankruptcy if you’re using one house’s equity to pay for another’s repairs. Plus, each home requires attention, and unless you’re quitting your day job — which the experts also don’t recommend for newbies — you will probably have plenty to do for one house without thinking about your next flip.
- However long you think the renovation will take and whatever you estimate it will cost, just understand that it will probably be much costlier and more time-consuming.
- Nearly every upgrade you skimp on will haunt you, remodelers warn. From cheap carpet to cheap electricians, quality of workmanship is something that flippers cannot fake in a softening market.