House Flipping: The Flipping Truth

House flipping has been popular ever since people realized that a home does not have to merely be a form of shelter, but it can be a source …

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House flipping has been popular ever since people realized that a home does not have to merely be a form of shelter, but it can be a source of profit, too. Flipping has also been glamorized and sensationalized on reality television shows such as Bravo’s Flipping out or TLC’s Flip this House. While both showed the trials and tribulations of sinking significant money and hard work into a home just to leave it in the hands of the housing market, it also conveyed the rush, flexibility and, oftentimes, profits that resulted. Though the housing bubble burst certainly cannot be placed solely on the shoulders of real estate reality TV stars, their shows allowed America to peak through their newly renovated windows and into the world of flipping. Soon, what was once reserved for only the savviest real estate investors and professionals was now an option for millions of Americans who could easily secure mortgages before the year 2006.

Unfortunately, as many Americans have come to find out, flipping a home involves more than instant financing and an interest in interior decorating. Depending upon whose numbers you use, some believe that real estate investors purchased between 8.5 percent and 33 percent of all homes sold last year. According to the Mortgage Bankers Association, one out of 200 homes will be foreclosed upon, meaning that 250,000 homeowners will enter foreclosure every three months – and many of these will be home flippers.

Clearly, flipping homes for profit over the past few years has not been as profitable as it could have been, especially if investors bought while home values were still on the rise, but were unable to renovate and sell before the decline hit. But for every house flipper who found himself in hot water during the latest housing downturn, there is another one who has made a killing off of turning homes for profit.

Though there is no magic formula to turning a rundown property into a cash cow, there are certain rules and strategies that most successful flippers use to net top dollar for their homes.

Flipping Rules to Live By

1. Act like a professional

Realize that flipping homes is a complex, money-intense job. Just as the average Joe wouldn’t purchase $50,000 worth of auto parts in the hopes of turning his used family car into a bachelor’s dream car, a real estate investor shouldn’t plunk tens of thousands of dollars into a project that he does not know how to handle.

“It’s ludicrous to jump into home flipping unless you know what you’re doing,” said R.L. Brown, CEO of RL Brown Reports, which researches and analyzes the real estate and home building markets. “Many people who got involved in flipping in 2005 are people who have lost their nest eggs, their livelihoods, their homes and even families because they were doing something that they had no business doing.”

Brown said that most flippers ingratiate themselves with market data, invest in other real estate projects and form relationships with contractors and brokers before taking on the challenge of flipping. “They monitor market activity on a monthly basis and understand the supply and demand relationship neighborhood by neighborhood,” he said.

2. Know when to call the professionals

No one person can handle a property from start to finish, whether that involves building, renovating or selling a home. One of a flipper’s biggest challenges is keeping repair and renovation costs down. This is because, at a certain point, the money invested in repairs will cost more than a person is willing to spend for that amenity. One way to keep costs low is to tackle small projects yourself or to hire non-professionals such as a neighbor, relative or friend to do them. Painting, stripping wallpaper and moving furniture can be easily accomplished by amateurs, while it is well worth it to call a professional to install electrical wiring and plumbing. Many investors flip numerous houses at the same time, so it’s a good idea to form a reputable relationship with contractors and other service workers whom you can come to rely on again and again. If they know that more work will be in the pipeline they’re likely to quote you a discounted rate or throw in small repair jobs for free. To preserve profits even further, some flippers even obtain a real estate license to eliminate the commission and fees that go along with brokers.

Remember, too, that it is a buyer’s market, with thousands of distressed properties and desperate sellers. One of the benefits of a buyer’s market, aside from lower prices, is that a seller and his agent is a lot more likely to work with you to get the deal done. As market competition has all but vanished, it is not so unreasonable to request that a seller handle some of the repairs stated on the general home inspection report. Many investors also hire a termite inspector before making the sale final.

3. Take your time

Most real estate professionals will tell you that, aside from location, timing is key. Flippers who were caught in the latest downturn can no doubt confirm this. As certain groups of people have been forced out of the market, other groups are being allowed in. Investors with superb credit and/or cash on-hand are primed to take advantage of the REOs, foreclosures, short sales, and bank sales and seizures. Resourceful investors are also pouncing on preforeclosures, FSBOs (For Sale By Owner), liens, sheriff sales and the large inventory of brand-new homes. With no end in sight to the housing slowdown, investors are afforded the time necessary to research their locations, market dynamics and property preferences. They can pass on homes where sellers are unwilling (or unable) to negotiate, attend as many open houses as they like and wait for the right property to come along. A key thing to remember in this market, however, is that just as investors have the luxury of being picky, so, too, do other homebuyers.

One strategy that professional flippers use to turn a profit in a less than desirable market is to price their homes less than the rest of the neighborhood. Even though every investor wants to make top dollar for their investments, those who want to continue to play in a hostile environment know that there is a price of admission. Many flippers must sacrifice higher home prices for the ability to put cash in their pockets now. Those who do not must have the liquidity and patience to hold for an extended period of time. Holding a property is usually not a good thing, but when it comes to home flipping in a down market an investor must choose between turning a quick, but lower, profit or holding out and paying some extra fees and taxes in the hopes that he will obtain a significant profit once the market turns. “It’s possible [to make a profit] flipping homes if someone doesn’t need the cash for a period of time,” Brown said.

In tough economic times, both risk and opportunity tend to emerge, as the standard players exit the market to lick their wounds and large incentives woo new investors in to take their place. It’s clear that flipping homes has allowed investors with a keen understanding of the real estate market and a responsible attitude to profit, the only question is whether the opportunity of low-priced housing mitigates the risk of an unsold home.
 

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