Tuesday, January 13, 2015

Flipping homes isn't easy but can be very rewarding with these strategies.

It’s true – flipping houses certainly is not easy. Though the practice was popular in the real estate boom, we could argue that people who tried to buy homes, fix them up, and resell them immediately for a profit were more speculators than sharpened flippers, riding the easy wave of rampant appreciation and no-risk financing. And while the real estate bust did litter the market with rock bottom priced foreclosures and short sales, many of the true bargains were had by cash buyers and institutional investors, not the average Joe.

But these days, even with our modest or leveled appreciation and common sense financing, it’s still possible to flip a home for profit. Flipped homes accounted for 4.6 percent of all U.S. single-family home sales in 2013 according to RealtyTrac, up from 4.2 percent in 2012 and only 2.6 percent in 2011. But caveat emptor – buyer beware – fixing and flipping correctly are functions of market research, competitive advantage, realistic goals, and patient strategy, not glamorous deal-making (like on the real estate TV shows) and quick $100,000 profits. So if you are going to undertake a “flip” the right way, here are some points to consider:

What’s your competitive advantage?
It’s tough to go into a home purchase with the intent to flip it without some sort of advantage that will make the numbers work in your favor. Do you have cash – or access to it – so you can close quickly and make offers on homes that are impossible to get loans against? Are you a contractor who can do the fixing work yourself? Without something in your favor, you may have a tough time.

If not, partner up.
If you don’t have that advantage don’t despair; you can partner up with someone who does have cash or is a contractor. In fact, having a partner for the first couple of flips you do is a great way to defer risk. Your contribution will most likely be the time and management it takes to make the whole thing happen.

What to look for in a house.
There are different strategies of course, but when starting out, I recommend looking for location, location, location…and square footage when identifying a property to flip. Find a big house in a desirable neighborhood that needs a lot of cosmetic work – like paint, carpet, tile, landscaping, etc. Once you do the work modernizing it, your value will be virtually guaranteed because of its size and neighborhood.

The right contractor is everything.
It’s extremely difficult to pay top-dollar retail prices on construction work and still pencil out a flip, especially if you get into big items like the roof, heat and AC systems, etc. But there are plenty of smaller contractors hungry for work who will do a great job. Have your team in place well ahead of closing on the purchase of the home and have all the work, materials, and timelines coordinated so you hit the ground running. Build performance or late clauses into their contracts so if they don’t perform, they’re not getting paid.

Of course you’ll want a great home inspection done before you commit to the property, and have your construction team with you to walk through and start planning at that time.

As a general rule, things always take longer than expected with a flip. There are always sneaky little unforeseen problems that pop up, so just to be safe, whatever your timeline for completion is, build in a 30-40% buffer when running numbers.

Be super conservative with costs.
Likewise, it always costs more than anticipated – almost never less. So budget for the unexpected and you’ll still be able to turn a profit even with obstacles.

Offer, then negotiate.
Remember that an offer to buy a property is really just the start of the negotiation, not the end. Of course you don’t want to waste anyone’s time, but if there is anything you see in the appraisal, roof inspection, home inspection, or seller disclosures that hints of diminished value, have your realtor renegotiate the price. Be aggressive and fair, and only remove contingencies and continue with the deal if you it pencils out as a great flip.

Avoid the “funky” spaces.
If a home has a garage conversion, an addition that looks anything short of perfect, or a sun porch built to be square footage, skip it. You won’t be able to solve those problems easily and the potential buyers will see them as negatives, not positives.

You want to put “lipstick on a pig.”
That’s flipper-speak for a cosmetic fixer, like we talked about. Paint, lighting fixtures, flooring, tile, countertops, landscaping, a few new appliances, etc. are the best ways to fix up a home inexpensively and efficiently and make a profit on the flip. Meanwhile, a new roof, new cabinets, plumbing problems, and installing heat and AC units will put a big dent in your budget. Of course, if you know these problems exist going in and you budget for them and your purchase price is reduced accordingly, then they could be just what you’re looking for.

Have a realistic exit strategy.
You’re always looking to pay less and get a great deal and guess what? So will the new buyer. So don’t expect to get the tip top of the market when you sell. Instead, set an aggressive sales price to attract lots of buyers and create a bidding war so you’ll sell the home quickly.

What’s your plan B?
We all plan to succeed, but with flipping houses it’s a good idea to formulate a plan B. So if the budget gets out of control so you can’t break even at a realistic price or it won’t sell soon enough, have a plan to put some renters in there for 6 months or a year until you can sell it – without losing your money.

Don’t count on appreciation.
I don’t recommend factoring any appreciation into your projected profits for a flip, especially if it’s a short term 3-6 month project. If the market goes up a little in that time, then it will be a bonus.

Be careful of financing.
If you get financing on your purchase and then try to flip it, talk to your lender and read the fine print, first. Many loans had prepayment penalties (less prevalent now) or 90-day flip restrictions (like FHA loans) that threw a monkey wrench in the plans to unload the house quickly.

Time into summer.
One way to maximize buying at the right time (low) and selling at the right time (high) is to buy a home in the winter, fix it up, and then put it back on the market in the spring or summer when there are generally more buyers and interest in moving.

Know everything about the neighborhood you’re buying in. Study many detailed market analysis and track what properties are for sale, pending, and closed as you’re undertaking your flip. There should be no surprises that you’re in a special flood zone, you can hear the train from the house, or prices are dropping.

It doesn’t hurt to have a “Coming Soon” sign on the property while you work or flyers showing the projected before and after photos. That will generate interest from passerby’s and those who live in the neighborhood, and you might even have a few people making offers the first day it’s on the market. 

Get ready for lots of work.

Buying, fixing, and flipping is an arduous process, with many early morning meetings with contractors and late nights at Home Depot. Remember that most of your important work is done before you even make an offer, when you’re identifying properties. A good realtor who understands your strategy and price points is invaluable, but you’ll have to do lots of legwork, too, to make sure it’s the right deal.

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