THE ART OF FLIPPING PROPERTIES
Written on October 14, 2011 by FHA 203K for Realtors
House flipping is, essentially, buying a house or property with the intent to sell it for a profit. But the logistics can get pretty complicated and why you need a Realtors on your side. There are a lot of decisions to make from the beginning. Where should you buy? If you purchase a house in an up-and-coming neighborhood, you’re banking on the neighborhood increasing in value and in this market I don’t think that’s the best place to look. 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 this market have some made a nice profits!
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 for months unless you can locate a foreclosed property that is both structurally sound, deeply discounted and in a good resale market. Working with me as your Realtor, I’ll not only search for foreclosed properties in good neighborhoods; but also introduce you to resources; home improvement and financing professionals that can help you accomplish your dreams of getting into this market.
Once I’ve determined where you want to buy, the next step is deciding what type of property you want to purchase and I
strongly recommend a single family dwelling in a moderately priced area (under 200,000). If you go for a fixer-upper and I would in this market, you’re committing to improving the home, which takes time and money. If you buy a foreclosed property in an auction or from a bank, you could get a bargain on a vastly under priced house. But remember that if the previous owners couldn’t pay the mortgage, they probably couldn’t pay for the upkeep, either — so you might have to deal with issues like a leaky roof and mold. I don’t want to turn you away from these home, but you do need to be aware of a homes issues to budget for their repairs when offering a bid.
Fixer-uppers and foreclosures are what most people think of when property flipping comes to mind. During the real-estate boom of the early to mid-2000s, flippers could buy new construction homes, hold on to them for a few months, then sell them at a profit. Of late there’s been a trend toward trying to flip houses in new, high-end developments in outlying suburbs and I’m not a big fan of that plan. If commercial and retail development spring up, it could bring in droves of residents. But if the situation isn’t perfect — if gas prices rise, for example, causing home buyers to shy away from big commutes — this kind of flipping becomes pretty risky.
So why do people flip houses? And what does the average buyer — and seller — need to know about flipping before investing? How much money can be made by flipping a house? I’ll address all of these issues with you as we investigate the house flipping.
House Flipping – 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 Out” are just a couple of the many cable channels that sing the 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. So where to start? If you are new to property flipping I recommend working with a professional called an FHA 203K Consultant. Although their services are required I’ve found have this type of professional working on your side can be invaluable for an inexperience property flipper
Red Flags
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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 for that friendly contractor. Always ask for references from contractors as well as vendors and make sure those references are from clients whose work had been completed several years back to see how the job has held up.
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. I prefer to point my clients to moderately priced homes that have been foreclosed on and in need of cosmetic repairs of under $35000.00. These homes appeal to a larger market of home buyers.
House Flipping Tips
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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, but 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.
Flipping Foreclosures
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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.
FIND FORECLOSED PROPERTIES IN BATON ROUGE
FIND MORE FORECLOSED AND SHORT SALES IN BATON ROUGE
Flipping Fixer-Uppers
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- 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 homes in Baton Rouge less the cost of repairs and needed renovations as compared to other homes in the neighborhood, so 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 hiring an FHA 203K Consultant to help you work with them. You’ll have to keep very close tabs on plumbers, electricians and handymen and make sue they are all licensed by the State of Louisiana 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.
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