Flipping Houses - Some Strategies
By Steve Gillman
It is time to update this page for 2012. Flipping houses for
a profit is not as common as it was when the article below was
first published, but it is still done. In the past, the flipper
had rising real estate values to help him out--something which
cannot be counted on at the moment. In fact, with prices still
falling in most areas of the country it is important to flip
those homes quickly.
Just buying cheap and selling for more is one of four strategies
covered here--perhaps the one least likely to work in today's
market. Fortunately there are three more ways presented here
as well.
1. Buying Low and Selling High
It's a strategy that sounds simple enough, and it was almost
easy at the height of the boom a few years back. With this strategy
repairs and improvements are minor or just not done. The whole
point is to buy cheap enough to sell quickly at a profit. When
real estate was appreciating by 20% annually in many cities,
this was an easier thing to do.
Those quickly rising prices help because you don't add much
if any value to the property in a "straight flip."
You have to make your profit by buying below market, sometimes
relying on the ignorance of owners. This type of "investing"
isn't always appreciated by the public, as you might imagine.
The transaction costs of buying and selling can eat up 10%
to 15% of the final sales price, making it difficult to do this
in the best of times. In a tough market like we have now you
might find a house for 20% less than what it's worth and still
only make a small profit. Even that requires that you sell it
before holding costs eat up those profits.
What has changed in recent times is that there are more and
more foreclosures coming onto the market, making it possible
to try this method once again. In Florida, for example, there
are many condos which the banks own. They have their own reasons
for needing to dump these properties fast (regulations require
it to some degree, and they lose the ability to lend as much
when they have liabilities like owned real estate). So it might
be possible to buy a condo for $60,000 which has a value of $80,000
without doing much to it.
2. Flipping Contracts
A common practice a few years ago was flipping houses by selling
the contracts. You make an offer, then sell your position to
another investor for a few thousand dollars. For an example,
let's suppose a home has a potential $30,000 profit after repairs,
based on the offer that you made and that was accepted. Another
investor who does the repairs might buy your position (the contract)
for $5,000. He still can make $25,000 if you estimated correctly.
Meanwhile you risk almost nothing if you do this right.
Even having cash to invest isn't really necessary for this
strategy, other than perhaps $500 for a good faith deposit (also
called "earnest money"). As long as you leave yourself
a way out in the contract you are relatively safe. Naturally
you need to have the right to assign it to another investor as
part of the original contract. This too, is much less common
since prices have been falling.
3. Flipping Houses With Sweat Equity
Many first-time investors think of this strategy when they
consider flipping a house for a profit. You just find a run-down
home, buy it cheap, and start spending all your free time painting
and repairing. Maybe you'll be done in a few months, sell the
house a few months after that, and make $20,000.
This can be a valuable experience for a first investment,
since doing everything yourself teaches you the costs of repairs
and improvements, and the basic process as well. It can also
be a way to reduce your risk a little bit by reducing costs.
For example, you could end up making only $7,000, and maybe you
would have lost money had you paid out $12,000 for others to
do everything.
Of course if you only made $7,000 that may be less for your
labor than a pizza delivery driver makes. In that case you bought
a job, not an investment. Also, since it takes more time and
you can't work on many projects at once, doing everything yourself
always limits what you can make. After you get some experience
then, you should consider flipping fixer uppers using a more
business-like strategy.
4. The Business of Flipping Houses
A friend invested in fixer uppers in the 1990s, buying and
selling fourteen houses one year. He never lifted a hammer or
raked a yard--nobody can handle more than a couple homes each
year when doing the work themselves.
He made less per house, on average, than some others who were
flipping houses, but he certainly made more money total on fourteen
homes than a do-it-yourselfer could make on two or three per
year. He had a good team of contractors and others busy preparing
one house while he spent his time finding the next profitable
project. You make it a business by delegating like this. Then
you are an investor rather than a handyman.
Another page to check out:
How to Sell a House
Other Changes in 2012
There is another aspect to flipping houses or condos in 2012.
There are currently more short sales than straight foreclosures.
These are sales in which the bank agrees to let the owner sell
for less than the loan balance due, and to write off the difference.
These can get tricky and they typically take several months to
negotiate and close. But that trouble scares away typical buyers,
keeping prices down.
Keep in mind too, that banks are not thrilled with investors
stepping in and buying cheap just to flip a house for a profit.
You might have plan to rent the property for a while before selling,
or even live in one of the homes you buy in this way. Renting
for a while can make sense in any case, if you are in an area
where prices are starting to rise or sales are picking up.
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