What is house flipping?
There has been a boom in people investing in real estate over the last few years as many now view buying real estate as a safer investment than the stock market, and certainly more profitable than savings accounts or bonds. When purchased for the right price, real estate can show significant appreciation over even a short amount of time, especially when buying a distressed property and rehabbing it.
House flippers generally buy properties that are in a distressed condition, selling below market value. By rehabbing the property, and bringing it up to average or above average condition for the neighborhood, rehabbers are frequently able to sell the properties at market value, making a good profit, even when considering rehab and holding costs.
Dream Homes By Roberta has several customers who make an excellent living from flipping properties full time. It is not unusual to see our borrowers achieve a 20% or greater profit from these projects. Of course, no results are guaranteed, and it is incumbent upon the flipper to buy the property at the right price, get the rehab done in a timely manner, and keep a tight control on costs.
What are the risks that I should be aware of, which ones are avoidable and how?
HOMEWORK! HOMEWORK! HOMEWORK! If you do your homework before hiring a real estate agent, entering into a contract of sale and hiring a contractor, you will be far more likely to avoid the risks of real estate investing and rehabbing than someone who does not put the time in. When hiring a real estate agent to help you find a property, hire an agent that specializes in Real Estate Owned (“REO”) or distressed homes. These agents frequently have the inside track on new listings on the market.
Get to know the neighborhood that you want to invest in. Go to open houses, see what is for sale, the condition of the properties, the sale price and the value per square foot. Look at websites such as Zillow.com and Realtor.com to get a sense of value and provide comparables for properties that you are interested in. Ask your realtor (if you are using one) to prepare a Comparative Market Analysis (“CMA”) for you. You should use all of these methods – never rely solely on what others tell you, do your own work and satisfy yourself as to current value and ARV.
When hiring a contractor, make sure that you are comfortable with the person you are hiring. First start with someone you have worked with before, or get references from people you trust. Once your contact someone, ask them for additional references. Even if you like the contractor, make sure to get at least three bids. You will be surprised how much variation there is in pricing.
Treat the bid appointment like a job interview. If the contractor is late, that can foretell their ability to manage time and whether your project will be done on time. Make sure that your selected contractor is licensed and insured. Make sure that you understand the time frame and the parameters of the bid, as well as how the payment schedule works, and that the contractor’s required payment schedule works for you. Make sure that there is a timetable for completion and a monetary penalty to the contractor if it is not finished on time. Making sure that both the borrower and contractor are on the same page can make a big difference to the success of a project .
Learn and Prepare
Being a successful real estate investor/flipper requires knowledge of many different areas of expertise. To name a few:
rehabilitation construction process and costs
principles of real estate finance
real estate marketing
Corporation/partnership tax law (for end of year reconciliations)
Gaining an understanding about all of the physical, legal and financial aspects of the home rehab process will always be a worthwhile use of the investor’s time. This knowledge will help to reduce unnecessary expense and increase profits.
Research is a house flipper’s best friend. Proper due diligence should be performed by every real estate investor before each transaction. Analyze all of the costs involved, including purchase price, title, lender closing costs and the cost of the actual rehabilitation. The next step is calculating the subject property’s true ARV (after repaired value). These steps will help to ensure that the forecasted profit goals are met.
Using Internet tools such as www.Zillow.com for property valuations, and a mortgage payment calculator (http://www.mortgagecalculator.org/ – mortgage calculator) is helpful. Combining sound knowledge with thorough due diligence will generally create positive results for the house flip. It is important to cover all aspects of the process. If you don’t have the knowledge yourself, then get help! A professional can be an invaluable resource, especially to the beginner house flipper.
Fix and Flip
Once you have bought the property, the next step is the rehab. Make sure your contractor is licensed and capable. Only work with someone you know personally, or about whom you have received excellent references. Be present at the project, don’t leave it up to someone else to safeguard your property and your money.
Also, be careful about your choice of decor – make sure that walls, countertops, flooring, etc. are colors and styles that will appeal to the majority of buyers. Be careful not to inject your personal taste into a house that will be someone else’s home! The property needs to appeal to the buyers, not the flipper.