How to keep house flipping from flopping

March 17, 2015

 

home for saleInterested in getting into the real estate game as a primary or side business? Buying, renovating and selling a house for profit, commonly referred to as “flipping” a house, can be a fast way to make a sizable return on an investment. After all, you can make $50,000 or more per flip and do it in just under 90 days. However, it’s important to understand what it takes to be successful in this type of business venture.

It starts with understanding the concept of house flipping. It’s defined as buying a run-down or “fixer upper” property at below market value, increasing its worth through renovations and updates, then rapidly re-selling it for a quick profit. This is different from development investing, in which the buyer purchases a property under development, then sells or rents the unit when it’s ready for occupancy.

Before you can even begin looking for a property to flip, it’s important to understand the actual process of buying a house.  Consulting with a Realtor to learn how to qualify for a loan, make an offer, negotiate and transact the purchasing contract is the first step down the road to success.  If you’ve bought a home before or are already familiar with the process, you can begin to think about the type of house you want to buy.

There are a number of considerations in finding the right house to flip:

  • The current market for buying and selling a house.  It’s a seller’s market right now, thanks to low inventory of available properties to buy, so you’ll need to do your homework to find a deal that can yield a profit.
  • How much work the property needs.  The improvements you make should be ones that add substantial value to the house, yet require the least amount of time and money. These can often be cosmetic changes like new paint, cleaned up landscaping and updated fixtures.
  • Houses that have broad appeal.  The average family is looking for three-bedroom homes that fall in the middle to upper range of the market – $200,000-$500,000 – so you want to look for properties that can be placed on the market in that price range and be suitable for a family.
  • Desirable neighborhood features.  Although you will be looking for a below-market house in poor condition, it’s important to consider neighborhoods that offer good schools, high “walk scores” for safety, low street traffic and noise, and other things that add to a quality of life.

Once you’ve found the right house and neighborhood, it’s time to get your financing in place.  If you don’t have cash reserves for the full purchase of a house, you’ll have to secure a loan. This means you’ll need to have your credit in good standing and have the ability to meet down payment requirements.  Be sure to secure several thousand dollars more in your loan in order to have the money necessary to make repairs and renovations.

The next step is getting the house professionally inspected. This is a key step but one often overlooked by house flippers because of costs. Knowing what major repairs are needed will help eliminate surprises in the future sales process which can impact your profit.

Once you know what work needs to be done to improve the property’s value, it’s time to start renovating.  Remember, you won’t be living in this house so don’t spend time or money decorating it in your own style. This is a profit-making venture for you, so don’t get attached to the house.  Make sure you perform every repair and renovation in a professional manner so that the quality of the work is there. You don’t want to open yourself up to a future lawsuit by the buyer for hidden defects or shoddy work.

Flipping a house can be risky because you’re incurring a large amount of debt for a potential payoff in the future. However, if the home doesn’t sell quickly for any reason, you will find yourself paying a mortgage and property taxes, and working to maintain the property.   You need to be in a financial position to assume that kind of additional expense.  In a worse case, you may have to sell a home for less than you bought it for, if the market takes a downward turn and you need to unload the house.

The amount of physical effort required is also a potential risk. How fit are you and how willing are you to do a lot of the work involved yourself in flipping the house? If you’ve never done renovations or fixes before, it will be a steep learning curve and the less you know, the longer it’ll take to flip the house.

If you feel up to the task, however, house flipping can be a lucrative way to increase your income.

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