Yahoo Finance What You Should Know Before Dipping Into Home Flipping
The TV shows make it look so easy. You buy an ugly house, fix it up in a week or two and then sell it for a whopping $100,000 profit.
But as anyone who has ever tried it knows, house flipping is a lot harder than it looks.
"The math never lies," says Brandon Turner, senior editor and community manager for BiggerPockets, a website for real estate investors, and a veteran flipper near Olympia, Wash.
And often, the math doesn't add up to a sizable payday when you factor in the time, effort, labor and money to execute a flip. But that doesn't keep people from trying.
Investors flipped 156,862 single-family homes in 2013, according to RealtyTrac, which defined a flipped home as one bought and sold twice within six months. The number of flips was up 16 percent from 2012 and 114 percent from 2011. The average gross profit for a completed flip -- or more accurately, the difference between the first sales price and the second sales price -- was $58,081.
[See: 8 Home Remodeling Projects That Are Worth the Money.]
Only 21 percent of those flips were foreclosure properties, according to RealtyTrac, down from 32 percent in 2011. And it has proved much more popular in some cities than others. Home flipping was up 141 percent in Virginia Beach, Va., 92 percent in Jacksonville, Fla., 88 percent in Baltimore and 79 percent in Atlanta. But it fell 43 percent in Philadelphia, 32 percent in Phoenix, 17 percent in Tampa, Fla., and Houston, and 15 percent in Denver. In 2013, there was a bigger increase in the flipping of properties that sold for $400,000 or more than in lower-priced properties.
"Investors have not lost interest in purchasing and flipping homes. In fact, now that we are seeing home price appreciation, they are more interested than ever," Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty, which covers Oklahoma City and Tulsa, Okla., said in a RealtyTrac news release. "The challenge for many would-be flippers in our markets is a shortage of available inventory to flip."
Flippers face four key challenges:
-- Finding a good house at a low enough price to make the deal work
-- Finding reliable contractors to do quality work at a reasonable price
-- Finding money to finance the deal
-- Selling the home at a price that will cover expenses and provide enough profit to compensate for the time invested
If location, location, location is the mantra for all real estate, "do the math, do the math, do the math" should be the mantra for would-be flippers.
And we mean all the math.
For example, if you calculate a potential flip this way: Buy a house for $100,000, spend $20,000 on improvements, sell it for $150,000 and earn $30,000 profit, you clearly haven't done all the math that's needed.
What about the cost of borrowed money and the cost of selling the house? What if the contractor discovers, once he starts the work, that half the plumbing lines are rotted? What about the cost of insurance, utilities and property taxes while you own the house?
You must dig below the surface-level figures to paint a complete and accurate picture of the flipping opportunity. Only then can you determine whether it's a sound financial move for you.
Experienced flippers recommend buying properties in which the ARV, or after repair value, is no more than 70 percent of the estimated sales price. Estimating the sales price accurately is in itself a challenge, requiring significant research into how much similar properties netted. BiggerPockets.com has online calculators, as well as bulletin boards and articles providing advice. Zillow, Trulia, Redfin, Realtor.com and local public records are all good places to start tracking home sale prices.
[Read: Buying and Selling a House: Can You Handle 2 Mortgages at Once?]
Competition for well-priced houses listed in the multiple listing service has pushed investors to other methods of finding deals, including direct mail marketing and the "I buy houses -- cash" signs that you see in some cities.
In recent years, many investors who might have once flipped houses have adopted a buy-and-hold strategy, turning many homes in their possession into rental properties while they wait for their value to rise. But that approach creates its own set of headaches.
Even experienced flippers sometimes make mistakes. Turner tells the story of a duplex he bought for $40,000, spent nine months renovating from top to bottom and then put on the market for $170,000. Despite adding hardwood floors, granite countertops and new windows plus overhauling the floor plan to convert the duplex into a single-family home, Turner finally sold the home a year later for $125,000, making not a cent on the deal.
This failed flipping attempt taught him several important lessons, but the most important was to study the kinds of houses people are buying in the surrounding neighborhood.
"The ideal flip is also the ideal purchase," Turner says. "You find what people are buying and look to create that."
If you notice that three-bedroom, two-bathroom homes are popular, for example, that's what you want to buy and sell. Turner looks for homes that don't meet the ideal criteria but could with a small amount of work. If he's shooting for the three-bedroom, two-bathroom home that everyone is snatching up in the area, a house with two bedrooms, two bathrooms and a bonus room would be a good property to target for a flip. A three-bedroom, one-bathroom home to which another bath could easily be added would also work quite well.
[Read: Strategies for Buying a Foreclosure in a Seller's Market.]
Turner points out that flipping houses is not for someone who has no money. While it is possible to borrow money to buy and fix up homes, doing so isn't easy or cheap. Many conventional lenders won't lend on homes in poor condition or to investors who can't show reliable income and assets.
"Hard money" lenders finance flips, but the rates are high -- perhaps 10 percent to 12 percent, plus three to four points in cash up front, Turner says.
He advises seeking loans from people who have money invested in lower-paying instruments, such as certificates of deposit, and offering them higher rates with a private mortgage or another kind of equity partnership. "Live a life of networking," he advises.
Nationwide, individual investors bought 21 percent of the homes sold nationwide in February, and 73 percent of them paid entirely in cash, according to the National Association of Realtors.
The other major challenge faced by nearly all flippers is finding good and affordable contractors. Too many would-be flippers try to get by with marginal contractors who do marginal work, which often creates more expense.
"Those are the ones most flippers gravitate toward, and those are the reason most flippers fail," Turner says.
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