House flipping is the purchasing of property with the intention of quickly selling it for a profit. It’s no longer an unknown concept, thanks to popular television programs such as “Flip This House” and “Flip That House.” They make it look pretty simple and exceptionally profitable. In reality, it is simple, provided you know what you’re doing, and understand the associated risks; it may or may not be as profitable, depending upon many factors.

Most properties with flipping potential are bargain priced relative to the market. The buy-fix-flip option involves buying distressed property that is in need of some cosmetic or aesthetic improvements; perhaps the owners didn’t have the time, money or inclination to do it themselves. That’s a good thing for the investor, provided that it is only cosmetic, and not structural, improvements that are required. How smug will you feel when you find out that the parquet flooring under the worn out linoleum that you’d planned to replace, is actually rotted through the floorboards, and you need to replace everything.

So, what are some of the considerations you should be making to maximize your resale price?

  1. Don’t spend too much money just acquiring the property. The less you pay, the better, obviously, and don’t assume that just because you got a low price that you got a good price. Do your homework and check comparably distressed properties in the neighborhood.
  2. Unless you’ve got strong handyman qualifications yourself, consider hiring a home inspector to thoroughly check out the property. This may already be a requirement of your loan.
  3. Calculate how much money your necessary improvements will cost for acquisition, installation, labor, etc. If you do the work yourself, factor in your cost of time element.
  4. Calculate how much your carrying costs will be while you’re doing the repairs; what if you have to hold the property longer than expected? Include your mortgage payments, interest, taxes, insurance and utilities. Bear in mind that some insurance companies may not even be willing to insure a vacant house, especially one that’s under repair.
  5. Consider the profit you’re hoping to obtain. If it’s 15 to 20% above your purchase price, will you be able to sell it for that? The improvements shouldn’t outpace the neighborhood. Don’t forget to factor in your selling costs, as well.

What if you’ve bought the property, made the improvements, calculated the price you need to sell it for to achieve the profit goal you’ve set, and the bottom drops out of the market? Don’t sweat it; you’ve created a wonderful rental property, haven’t you? And everyone has to live somewhere. Hold onto the property until the markets rebounds, and then re-price it, if necessary. Just be prepared for the fact that the rent check will likely be less than any mortgage payments you are making on the property.

It’s been said that you make money on your real estate investments when you buy your property, not when you sell it. That may or may not always be entirely true, but you’ll have a better likelihood of success if you make your property purchases wisely, especially as it pertains to the potential buy-fix-flip property. That can be easier said than done.

 

Barb Zigah is a freelance writer covering real estate and business topics.

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