With the recent downturn in the real estate market across the country, both professional and amateur investors have entered the “house flipping” business. House flipping is when you purchase a property at below market value and then resell it for a profit. The most common causes for a property to be “distressed” or below market value is that it is a foreclosure, short sale, damaged or just abandoned for any number of reasons.
With all of the new investors entering the house flipping market the competition to get a good deal has significantly increased. This is driving up the prices of these distressed properties and shrinking profit margins. However if you do find a good deal for a house flip you should stop and ask yourself the following questions before proceeding with the purchase.
1) Did you hire a home inspection expert to check out the property and make sure there are no major repairs needed? Cosmetic fixups like having to repaint or replace a door or window are no big deal. But if your inspector tells you that the house needs a new roof, you are most likely going to want to pass on this property. Every repair eats into your profit margin so you need a qualified expert to tell you exactly what it is you are buying.
2) Does the property belong in the neighborhood where it resides? Every neighborhood has that one house known as the “white elephant”. It’s the house that just doesn’t belong with the rest of the herd because it is so different. Either it is overdeveloped or the wrong type of property. For example, you don’t want to buy a single family house that is in the middle of a block filled with high rise apartments. You don’t want to buy the odd-ball property on the block as it will be so much harder, if not impossible, to sell and make a profit on.
3) Do the recent sales, or “comps” in the neighborhood support the value you think you can get for the house when you go to sell it? If you pay $100,000 for a house that needs repairs and all of the other houses on the block are only selling for $110,000, then you are not going to make any money. You want to buy properties that are distressed, in need of repairs, and selling way below the market value of the rest of the neighborhood.
4) Will the repairs needed to make the property marketable be affordable? You want to make as few major repairs to a property as is absolutely necessary. And the last thing you want to do is start tearing down walls or expanding the house. This is what turns a profitable flip into a money pit. Leave the heavy lifting of remodeling and customizing the house to the people you sell it to. You just need to make the house look pretty.
5) Can you make your repairs to the house in the shortest amount of time possible? This is very important because every month you spend fixing the property you have carrying costs and expenses associated with owning that property. These are the hidden figures that can eat away at your profit margin. If a house does need significant repairs, make sure you budget in these carrying costs when determining how much to pay for the house. Also, make sure you have the time commitment to get the work done. Don’t buy a house that needs five months work of work if in three months you plan on going on vacation!
6) Is the property located in an area where there are buyers and houses turn over regularly? It’s very easy to at first look find a property and think this is a steal after looking at the comps. What you need to also look at is how old are the comps? When was the last house sold in the neighborhood? How many houses in that neighborhood sell every month? A great price on a house does you no good if it’s going to take you six months to sell it.
7) Do you need to hire a professional contractor to do the repairs? We all like to think of ourselves as handymen or women. That we can fix anything and why do I need to pay someone to do something I can do myself. Most of the house flipping disasters I have seen were caused by homeowners who decided all of a sudden they were professional builders. It’s great to think you can tile a bathroom floor all by yourself. It’s another thing to actually go out and do it. These are people who are dollar smart but penny foolish. Don’t take on more than you can handle.
These questions will give you a guideline of what makes a good flip. If you take the time to answer them before you buy you will have a much greater chance at successfully making a profit on your investment.