Flipping is a term to describe buying and reselling Real Estate for a profit. There are two ways to do this for a profit. Both include buying a property in a distressed state, either from a homeowner who has a distressed situation such as divorce, foreclosure, bankruptcy and etc. or the property itself is in distressed condition. In either case you can help people by relieving them of their problem when the traditional methods of selling Real Estate aren’t viable for them. In return if evaluated correctly and the right price is negotiated, you can make great money.
The first strategy to flipping a property is to build a buyer list of other investors that you can resale these properties to in as is condition. This is commonly referred to as wholesaling. This strategy is for the full time Investor that has the time to market and look at houses on a daily basis. Instead of using your time and money to renovate a property over a 3 to 6 month period, you take a smaller but much quicker profit and sell it immediately and sometimes the same day. The second and most commonly known is rehabbing, this provides a greater profit because you will be bringing the property up to its maximum value. This will involve rehabbing the property to bring it to market standards of your area to. Done correctly you can maximize the profit and sell for retail.
Rehhabing can be very profitable and provide the biggest return of all the real estate investment models. This model also has the longest process and is the most involved. Besides finding, evaluating repair costs, determining the ARV (after repair value) and negotiating the purchase price, you will have the following to complete:
- Scopes of work
- Finding the right contractors
- Contractor agreements
- Managing the rehab
- Selling or renting
Although Rehabbing can be the most profitable it can also be the most risky. So, that’s why this section is very important and if followed can assist in being your guide to realizing the best short term return for your time and money.
A Rehabber can be defined as someone who buys a home and then fixes it up and sells it within a six month timeframe.
Here are some of the biggest mistakes ‘Rehabbers’ make:
- Not estimating enough for repairs
- Paying too much for a property because they didn’t account for all of the work needed
- Didn’t figure in hidden expenses like utilities, holding costs, selling costs, etc.
- Doing the work themselves to save money
- Over extending themselves by growing too quick. Meaning one goes out and buys several properties at once and gets in over their head
- Not knowing the area/ neighborhood
- Over improving, or under improving
o Granite counter tops in an area where they are not common
o Slate or ceramic tile in an area where linoleum is acceptable
There is always a demand for people who rehab houses. Mainly because there will always be distressed properties and a shortage of buyers to buy them. For the average home buyer, financing is nearly impossible to get for a distressed property and therefore limits the demand. The average home buyer doesn’t have the income or cash to put 20% to 30% down not to mention the additional money needed to rehab the property. So, the worse the condition of the potential property the better for you to get a good deal and have a good investment. Don’t get me wrong we all like an easy carpet and paint rehab, but they don’t always have the highest margins and every investor in the market will be bidding on them. Generally speaking, the uglier the house the less interest it will have from other buyers therefore driving down the price and giving you more leverage to negotiate.
There is always a house to be rehabbed because retail buyers want move in ready homes, and obviously not all homes can be in this condition. Look at local numbers in the areas you are familiar with to figure out the number of distressed homes and the relative real estate market.
As I write this there is a big shortage of homes that are move in ready in almost all price ranges because of the previous 7 years of a declining market, distressed sales, short sales, family hardships, and foreclosures have all left lots of homes needing work. And a great opportunity for you as a real estate investor to get in at the right price put the right amount of work into it and FLIP!
Identifying a deal
You need to do your research when determining if the property is worth investing in and having an exit strategy in place is the most important. When evaluating a property and determining an exit strategy there are a couple of factors to consider:
1) You need to think using a buyer’s point of view. The person buying is typically thinking of owning this home for a long time. Typically a 3 to 7 year timeframe on average.
2) Is it a hot or cold resale area? You should look at the comparables to determine the sold’s and pending’s versus active listings. Ideally 50 percent of the listings in the area should be pending’s and sold’s in the last 3 to 6 months. Meaning if there are 10 listings that come when you do your search there should be a minimum of 5 that have a status of sold or pending. This is a good indicator of the activity in the area.
3) School district- Obviously the better the rating of the school district, the higher the values are for resale. This is true for rentals of course, but it’s a must for resale.
Now back to flipping. Here are some other things to watch out for when trying to sell your flip on the retail market:
- Consider that some investment properties are great for rentals but not necessarily for rehabs. This is to be the case when a property is at or somewhat below market value and doesn’t need a lot of fixing up in order to realize rental income by renting the property out. Obviously you don’t want to purchase a property, put a lot of money into the rehab and not see a return on your investment. This is why it is important to thoroughly research your investments and make sure that each property fits the business model that you are looking to follow.
- Low price point houses may fit your buying formula, but in these areas the residents may not have the means or the credit to get loan approval. Smaller profits. Depending on the neighborhood this equates to not as much value increase in a home once it has been rehabbed and ready to flip. Make sure to do your homework to make sure the time and money you invest in a flip will be worth it to sell it on the retail market.
- If you see horizontal cracks in the basement, crooked openings like doorways or windows they could be signs of a structural issue. These can all be telltale signs that there is a grading problem or the house was built in some kind of unstable ground. Until you get a lot of experience in dealing with these issues, stay away! Keep in mind that structural improvements can eat away at your profit quickly, but they can also be some of the most important improvements to make.
- Major roads or homes next to commercial or industrial property are typically less desirable to undesirable to a buyer. They may work for a rehab to rent scenario but these are major deterrents to the potential homeowners. No one wants to worry about Sparky the dog or their child running out in to a 45 mph road with traffic.