It sounds so simple: purchase a home for well below market value, make a few updates and then sell it for a profit a few months later. For many real estate investors, it really was that simple.
Until the real estate bubble burst in 2008. When the market tanked, so did the concept of “flipping,” or buying a house only to sell it again within six months. There may have been a surplus of affordable properties on the market thanks to foreclosures, but there simply weren’t enough buyers looking for homes — or able to get a mortgage in order to do so.
Now that the housing market is improving, and banks are lending money again, house flipping is making a comeback. Since 2011, the number of properties that have been “flipped” increased by 114 percent, and the forward momentum is expected to continue through 2014. Once again, real estate is a solid investment, and flipping houses can lead to some significant profits — but only if you do it right.Not as Easy as It Looks
Spend some time watching any of the dozens of home improvement shows on television, and you might be tempted to think flipping a home is a piece of cake. A coat of paint here, some new flooring there, maybe some landscaping and voila! Buyers will be knocking down the door, ready to pay the full asking price.
In some markets, where competition for “move-in ready” properties is intense, it’s definitely more likely a newly remodeled home will sell quickly. However, before you get into home flipping thinking it’s a fast lane to big profits, consider a few important factors.
Flipping Costs Money
The cost of flipping a home goes well beyond the cost of buying the property. If you don’t pay cash for the property, you’ll have to pay interest on the loan, in addition to renovation costs, taxes, utilities, selling costs and possibly, when you sell the property, capital gains taxes. If the home doesn’t sell right away, you will have to pay the maintenance costs and taxes for as long as it’s in your name.
It’s important to keep these costs in mind because you may have to hold on to the house for at least 90 days after the purchase. The Federal Housing Administration established anti-flipping rules preventing buyers from getting FHA mortgage insurance on homes sold less than 90 days after they were purchase. Homes sold within six months of purchase also require an additional appraisal to confirm the asking price is fair.
If you take out a mortgage to buy the property, you may face a pre-payment penalty if you pay the loan back too soon. Not all mortgages include this term, but if yours does, you could end up paying thousands of dollars in penalties, which eats your profit.
Flipping Takes Time
Regardless of what it looks like on television, renovating a home takes time. Even if the property only requires basic cosmetic updates, such as new paint and fixtures, you’ll need a few weeks to get it ready to sell. If you need to make more major renovations, the time frame gets longer.
Flipping Requires Skill
Anyone can change a light bulb or plant some flowers. To maximize your investment, you should plan to put some sweat equity into the property. If you lack the necessary skills, you’ll have to hire professionals to do the work — which again could eat into your profit.Flipping Requires An Understanding of the Market.
The housing market may be bouncing back, but what is the market like in your city? Consider the neighborhood where the property is located and whether you can make a substantial profit when you sell. The asking price for the rehabbed homes must be in line with the other homes in the neighborhood or it won’t sell. That means you cannot reasonably expect to purchase a foreclosure for $75,000, upgrade it and sell it for $200,000 if every other house in the neighborhood is valued at less than $150,000. You also need to understand which renovations are necessary and which are not — and what buyers in that market are looking for. Adding a gourmet kitchen with high end appliances and granite counters might be a necessity in some markets, but will price the home out of the neighborhood in others.
House flipping can be a viable source of income and help you build your wealth, but only if you do it right and make smart decisions. Before you rush into that “great deal” you saw in local real estate listings, consider all of the risks and costs and proceed with caution.