Over the last several years, the big buzzword in real estate has been “Flipping”. Exactly what is flipping, and how it works and how you profit from it is simple? Flipping is simply when you buy a property and resell it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties, most of which are legal and profitable, and some of which are not.
Let’s start with the most common form, the “fix ‘n flip”. This process involves you buying a property that needs work, then you fixing it up, then selling it on the “retail” market, to a person who will live in the property. You can easily make twenty, thirty, forty thousand dollars or more on one deal, depending on your market and how good you are at negotiating bargains. The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs analysis and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.
Don’t like to or can’t do fix-up work? Consider selling the property “as is” and/or as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This may especially be the case with houses in “transitioning” neighborhoods. Make sure, of course, that you acquire the property at sufficiently discounted enough price that you can sell it below market quickly and still profit. This is the property you will probably find more often than the others.
Wholesaling the fix and flip, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won’t make nearly as much as the rehabber, but you will realize your profit quickly. You can find bulk buying and selling can add up at the end of the year.
Rather than sell the fixed up property for all cash, you can buy, refinance and Lease/Option, and than sell for terms. Once you have completed the rehab, you will refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a lease with option to buy. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don’t have to pay a broker’s fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate. This should only be done if you understand where you are in the real estate market cycle.
In very hot real estate markets, prices are appreciating as much as 2% per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete. If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true – you could end up losing money if the local economy tanks and you end up with a worthless condo that you can’t sell for more than you paid. Use this approach very carefully. In a soft market, it’s a great time to meet builders, as they have more time to talk to you, and may have some distressed properties themselves.
If none of this appeals to you, scouting might be your ticket. Technically a scout is not a property flipper, he/she is a “bird dog” who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.
Illegal flipping is something you will see quite often. Illegal property-flipping schemes work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. I call these chicken-wire fix-ups. They do cheap and shoddy renovations to the properties and sell them to unsuspecting and unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are federally insured, the government authorities have investigated this practice and arrested many of the parties involved. As a result, the public perceives flipping to be illegal.
The fact is, “flipping”, as described this article, is not illegal. Loan fraud when in the process of flipping is illegal, so please don’t confuse the two. Flipping houses is very legal, very ethical and can be very profitable! So good luck and have fun while you are out looking for your next house to flip.