Use Caution When Flipping Homes - Exercise Caution When Flipping
Several years ago, when the housing market was in a boom stage, many people turned their attention away from Wall Street and toward the profitable practice of real estate flipping.
Flipping of course refers to the practice of purchasing real estate for the express purpose of quickly reselling it, rather than living in it or using it yourself. In 2005, a survey of the National Real Estate Association estimated that some 25% of real estate purchases were made by those expressly interested in flipping, meaning that one in four persons who bought a home didn‚€™t plan on ever living in it themselves.
This practice is one that can actually have a positive impact on an entire neighborhood. Flipping can encourage a rejuvenation and restoration; an unkempt house can be known for attracting a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on. The restoration of home flipping creates jobs, particularly in construction. This in turn generates more sales for local retailers and vendors, which also creates more revenue in the form of sales taxes for the neighborhood.
The remodeled home‚€™s higher assessed values brings more property tax revenues to local governments as well, both allowing for additional improvements and maintenance to the neighborhood‚€™s infrastructure.
Even on a single home basis, flipping can have positive impacts (the house itself will be in better condition and last longer, and can be sold at a higher price, thus increasing its property tax assessed value, plus increased sales for goods and services related to property improvement and the related increase in sales taxes).
Television programs have also been written to center around full-time flippers, as they purchase properties, typically those in distress, and work with contractors to repair and fix them up, and then attempt to resell them. Of course everyone‚€™s main interest was in the profit that was made after the cost of purchase, plus labor and materials needed for restoring the home.
And for some, the profit was tremendous. One couple reported that they ‚€œdabbled‚€Ě in flipping ‚€“ to the tune of some $1 million every year. ‚€œTheres no question that this has the potential to make large gains,‚€Ě he was quoted as saying. ‚€œThis is a very good way to supplement your income, and even at some point, if it works well for someone, could even be a full-time job.‚€Ě
To start flipping.
Obvious there is more to being successful in real estate flipping than just buying a property, doing some minor cosmetic work, and then quickly reselling it. As they say, if it were that easy, everyone would be doing it.
So then what is involved in being successful when it comes to real estate flipping? What are some things you can think about, so as to avoid some common pitfalls? There are some basic principles to keep in mind:
Do your homework. Find out about the neighborhood, and look at comparable homes. Are other homes selling well, and if so, for how much? And how quickly? Remember, there may be a reason that a home has been on the market, and it might not have everything to do with the home itself.
Get organized, and create a plan. Make notes of everything that needs to be done to the property. Realistically, how long will that take, and what will it cost? What type of profit margin does that give you? What are some possible things that might go wrong, with the property, with your contractors, with your finances and materials? How will you address any of these issues?
Get yourself a good team. Just because you know how to put up drywall or fix a leaky faucet doesn‚€™t mean you know how to completely renovate a broken-down house. Find a good team of contractors, and listen to what they‚€™re telling you. And do the same for the business end of it as well ‚€“ consult with a home inspector, a realtor, a tax consultant, and even an attorney to advise you on all the necessary paperwork, market conditions, and so on.
Have a back-up plan. What if the home doesn‚€™t sell immediately? Are you prepared to rent it out? Do you have another means of cash flow, i.e., a full-time job, to carry you while you at least start out in the business?
Think long term. Traditionally, real estate performs very well. However, things don‚€™t always go as planned, and you may need to find a short-term solution, such as that renter or other job to get you through. Having some patience is the key to being a successful flipper ‚€“ and to so many other aspects of the real estate industry.
Some words of caution.
An interesting comment was made about flipping a few years ago. Realtor Todd Nordstrom said that ‚€œflipping‚€Ě was becoming so popular that people needed to be extra careful. With so many properties on the market, prices will be driven down, he said.
In the past few years especially has this been true, as the sub-prime mortgage crisis has flooded the residential real estate market with an absolute glut of inventory. Many realtors are seeing home prices coming down 10%, 20%, sometimes even 40% than they were previously.
Real estate is often thought of as a very safe and secure investment, but of course there are no guarantees, and today‚€™s real estate market conditions bear this out completely. Many real estate investors have been left ‚€œholding the bag‚€Ě as it were, losing their capital in soft markets and areas where the residents are pouring out faster than they are trickling in. Simply jumping into real estate flipping because it sounds like a good venture, or simply because other people have made money on it in the past, would be shortsighted and very unwise.
So if you‚€™re interested in real estate flipping, you definitely need to exercise caution as to the area you‚€™re interested in, and the properties themselves. By using your common sense and listening to your advisors, you can find that flipping is a very profitable investment.