Flipping Houses

Buy it, Fix it, Sell It

Most people have heard of Flipping property. You may have even watched a couple of the t.v. shows on the subject. If you have, then you know this isn't always a sure fire way to make money. But if done correctly, it can pay off, sometimes quite handsomely!

Flipping is a strategy that is normally used when people want to Create Capital.

It works likes this. You buy a house for significantly under market value that needs some improvements, buy the property, quickly make the necessary improvements, and then relist the property to sell for a profit. What Profit will be determined by the price paid for the house, the cost of said improvements made, market conditions when listing the property, and what the house eventually sells for.

Most investors can make a minimum of $10,000 flipping homes, some a whole lot more!

If you're looking at it strictly from an ROI (return on investment, or profit divided by cash invested) point of view, then most investors want to see at least a 20% ROI. 40-50% is more common, however.

For example, let's say you made a $20,000 down payment on a house, spent $20,000 on improvements, and had $9,000 in closing costs (buy and sell side) and carrying costs (you'll have mortgage payments, utilities, etc. still due while you're fixing it up), and you were able to eventually sell it for a $10,000 net profit. Then your ROI would be 20% ($10,000 divided by $49,000).

As far as an investor is concerned, if they can take their $49,000 somewhere else and get a better than 20% return, this would probably be a bad deal for them. But if there are no deals out there giving a 20% return, then flipping this property would be a good deal for them.

In order to make a technique like this work, several factors must be present:

• The Money is always made on the Buy! In order to be successful in making a profit by flipping homes, you must purchase the property for at least 20% below fair market value, preferably 30-40%. Normally, if you are buying a distressed property, there will be a certain discount built in to the asking price already, but do your due diligence of the comparables to make sure it is enough. Why? Because, when you sell, you will have to pay off the mortgage (if there is one), payback to yourself all your closing costs, carrying costs, and commissions, and then and only then what is left is your profit. If you pay too much, you will have less profit after accounting for costs. So buy as low as possible, and never pay 20% or less of market value.

Using the prior example, you buy a house for $100,000, spend $20,000 for improvements and another $9,000 in closing and carrying costs. If you sell for $139,000, you will have made $10,000 in profit. However, if you had originally paid $110,000 for the house, guess what? No profit. See how important buying right can be?

• When buying a distressed property, once you take title, be prepared to get in there and start work immediately! During escrow, have your Contractors and rehabbers get in the property and start giving you bids. Accept the bids you like, give them their start date, and then on the day escrow closes, have them get to work!

Also, once you know for certain that the escrow will close, any major purchases that will need to be made should be located and verified that there won’t be long shipment waits or manufacturer delays. This can commonly happen with appliances, kitchen cabinets and counter tops, carpet, etc. Having good relationships with your vendors so they can get you what you need quickly is priceless.

• Get your Realtor’s input early. What do they think the property will need to make it marketable and competitive. All too often investors forget this critical step. When they finally call their realtor in to set a price for the home and get it ready for market, they are told that they really should have done this or that, and it may be too late. Get your realtor’s input before you buy the house, right after you close, and during the rehab, and there should be no surprises.

• Don’t get Greedy! Sometimes, even after all of your due diligence, the market will shift in mid rehab, and when you’re finally ready to sell the property, you may not be able to get as much as you had once projected. If this happens to you, and you get an offer from someone willing to pay you a price that will still make you a profit, for crying out loud, take the offer!

All too often investors stick to their guns with some pie in the sky value from six months previous and truly believe that they deserve that price, they did a lot of work to the property, and they should get their price. But that’s not how real estate works. Real estate is based on supply and demand. If supply is high, you may not get your price, and you may never get another offer. So when you get an offer, make it work!

Your only other option is to rent the property until the market changes, and hopefully you have a cash flowing property if faced with that situation.

Flipping homes can put cash in your pocket if done correctly, but one or two minor mistakes, miscalculations, or plain stubborn judgment calls can also leave you holding a house you don't want and eat up all your profits if you don't do it right.