Flip What House?

It seems as though house flipping has replaced zero down purchasing as America’s favorite real estate investment pastime. For the uninformed, house flipping is the fine art of purchasing a house at a bargain price, improving it (or not) and then selling it for a profit. Selling at a profit is the key element here, the entire concept loses its glitter without the profit piece.

You can watch house flippers from all over the country, plying their trade, nearly every evening on cable television. Watch as they amass fabulous fortunes, profiting flip after flip after flip. Watch as they take some of the most obscenely dilapidated property anyone has ever seen and, with a modest investment and no personal effort, ring that cash register time after time.

CHA-CHING!

With the negotiating skills of Donald Trump, they beat down the price of their intended target, so that the flip begins at the right price. Then with management techniques that we haven’t seen since Charles Dickens, they shrewdly work deals with their contractors, to get them to work within their modest budgets. All this plays out on the small screen for all of America to enjoy. Hopefully these contractors don’t get cable, otherwise the flippers can’t use the same workers twice, as they reveal a lot of inside information and negotiating strategies for their viewing audience.

I have written several times before of my concern over the zero down investment. It’s dangerous, but typically the worst that happens is that you own property that you detest, yet have no equity in and therefore have little to lose. Certainly there can be catastrophic down sides, with foreclosure and personal credit issues. Although, even these negatives can be controlled if the deal is correctly constructed. House flipping is generally a different animal, your wager, as the flipper, is that you will be able to turn this sows ear into a silk purse. If you are correct, you achieve that profit goal of which we spoke. If you miscalculate you stand to take a serious financial hit. The monetary risk varies, based upon the way you’ve structured the package. If you borrowed all the necessary funds you must be concerned with carrying costs and the length of time this project takes. High carrying costs can quickly erode your anticipated profit. If you have used your own funds then you put that principle in peril, as well as losing potential earnings from those funds while they are tied up in the flip.

Since no one’s goal is to fail in an endeavor of this nature, let’s construct a list of guidelines to help you avoid the negative. Let me first begin with a proviso. If you have no personal knowledge of real estate or real estate values and if you know nothing about construction and renovation then take your hard-earned money and invest it in something you know about. House flipping is not for the dilettante or the faint of heart.

Now the rules;

Do your research – if you find a likely suspect for flipping, research the local real estate market for that property. It goes without saying that you must buy the property at the right price, however, there must be room in the values of that neighborhood to spend money on improvement and still sell for a profit. If you buy a house for $100,000 and it appears to be a good buy for the market and it will take $20,000 to bring it up to neighborhood standards AND the top price for a sale in that neighborhood is $125,000, PASS. You will acquire experience, but there is no profit in this flip. Always be cognizant of the concept of over-improvement. Knowledgeable buyers do not buy property that are seriously over improved for the local market.

Further, know your property from the condition aspect. There really is no room for surprises. Inspect it thoroughly before you acquire it. You don’t want to find a serious system problem AFTER you own it.

Find a crew that you can depend upon. Your work needs to get done in a timely and reliable manner. You can not rack up holding costs while waiting for your trades people to show up for work.

It helps if you bring some skill to the dance – if you can do your own electrical work or lay flooring, that’s one piece of the flip you won’t have to pay to have done.

Work quickly. The faster you can turn each property, the greater the room for modest error.

House flipping is actually a legitimate business and does provide a necessary community service. Improving the current housing stock in any community is always good for the community’s future.

Following these rules can get you pointed in the right direction, but getting to your destination is up to you.

Gary Straub is an independent real estate consultant and real estate professional for 36 years.