Flipping Properties
“Flipping” properties is a method of buying properties at a price below market value, renovating the properties, and then selling them for a profit. Most real estate investors who enjoy this method of flipping properties usually have some carpentry and construction skills or they create a partnership with someone who does. The reason for this is to save cost on the investment in labor, which is otherwise an out-of-pocket cash expense.
By doing as much of the work as possible themselves, if the property fails to sell for an adequate price, the loss for the investor is the time spent working on the property, not necessarily money paid to others for the work done. Nevertheless, there are material costs, which are hard costs to recover when the property sells.
People who become expert at flipping properties benefit from having these things:
• Construction or contracting skills.
• Hard money lenders ready to lend in order to capture a good deal quickly before someone else does. Usually, traditional mortgage financing is too slow to capture a good deal.
• Ability to see a good deal because of extensive market knowledge of a specific area.
• A keen eye for the difference between cosmetic improvements, like a new paint job, versus major structural repairs, such as extensive dry rot, mold infestation, or termite damage.
• Constantly on the lookout for highly motivated sellers.
• Ability to work intensively in hard bursts (18 hour days) to get a newly acquired property ready for sale, and then take a nice break after it sells.
• Enjoy the renovation process and have pride in the finished job.
• Ability to work with others as needed, such as sub-contractors or laborers.
• Negotiation skills to get good deals on buying the properties and construction materials.
• Have enough working capital to pay the down payment to acquire the property. Typically, hard money lenders will only lend 60% of the loan-to-value plus approved renovation expenses.
• Have enough savings to pay for normal life expenses, while waiting for a property to sell.
Opportunity and Risk
There are opportunities virtually everywhere for flipping properties. Motivated sellers may be going through a divorce and have to sell a property fast to split the proceeds between the spouses. On the other hand, they may need to sell quickly in order to move to another city for a new job. One of the best questions to ask a seller is why they need to sell a property.
Other opportunities come from the vast amount of homes that went into foreclosure that banks want to get rid of or others on the verge of foreclosure now. Some sell as a “short sale” for significantly less than the market value.
The risks are:
• Over-paying for the property – A good rule of thumb is the price must be 30% below market value, including the estimated costs for the renovation.
• Property has hidden faults – Underestimation of the time and money needed to make repairs is one of the most common mistakes. Renovation construction is full of surprises.
• Being under-capitalized – Not having enough money to finish the project.
Summary
Looking for great opportunities and managing the risks are the keys to being successful as a real estate investor who specializes in flipping properties.