If you want to maximize your profits with an investment property, then one of the fastest ways to do it is by flipping houses. Flipping properties is the term most commonly used in real estate when someone buys a property in some type of distress condition, invests in fixing it or resolving its legal issues, and resells the property for a profit in a short period of time, 60 to 90 days. If you have some money to invest and you want a quick return then this is a great way to get into the real estate business.
Usually, you will begin this process by finding a home that is under priced for the current real estate market. These are usually called “fixer uppers” and are available all the time on the market. Any type of foreclosure, home at an auction, or home that has been neglected can be bought for a lower price. Flipping properties will most likely be done by dealers, wholesalers or retailers, but it is possible for anyone to take part in the art of flipping homes.
After you have found a home that needs some fixing, you will buy it like you would any other property; although, if you want to maximize your profits, buying it cash will allow you to have a higher return. Usually, you will be liable for obtaining the mortgage and will sign a deed of trust for the property.
If you have never done this before, there are many points you have to seriously consider to avoid getting into an investment that will end up costing lots of money and pain, so take note of the following 6 tips.
- Pay attention to your local market economic conditions:
No one has a crystal ball to predict how the real estate market will behave in the future but you can always use some common sense. Look at the market trends taking place around your city. If prices are slowly going up, jobs are being created, or there are major developments that will potentially appreciate properties in the area you want to invest, then it is probably a good time to get into flipping a house. On the other hand, if you’re in a market where prices are rising too fast, out-pricing what the local market can afford, then you’re probably heading to the peak of high prices and the market will begin to regulate itself soon by bringing the prices back down.
Also pay attention to new laws and lending programs. If new lending programs come out for first time buyers, veterans, single mothers etc, then focus on the neighborhoods where those people will be looking to buy.
- How to find the right property to flip:
By far, the best way to get the lowest price is to find the deal yourself. If you know of someone that has a distressed home that needs to sell or is going through a lawsuit, foreclosure or simply cannot afford their mortgage, then you can step in to help them out and buy it directly. You can also market yourself with mailers to properties that have defaulted or are on “lis pendens” (this information can be provided by a realtor), and you can also go knocking on doors of the houses that are going through foreclosure, but this is very hard work and it’s time consuming. The second best alternative is to buy it from a “wholesaler”. These are groups of people that specialize in what I just described above. They find these distressed properties, put them under contract under market value, then during the due diligence process they will try to assign the contract to investors for 5,000 to 10,000 dollars for the investor to close the contract, complete the repairs and sell it himself.
To find these “wholesalers” start by asking around other investors, look for them online and sign up for their mailing lists to get the weekly deals. Also, try to find investor meetups where they will come to present the properties. Try meeting them, tell them exactly the type of property you are looking for and stay in touch so they can always keep you in mind and send you the deals before they’re announced to the whole investors community.
- Evaluate well the cost of rehabbing the property:
If you are not a contractor then advice yourself well before you buy the property. If home needs repairs, then go with someone that really knows what they are doing to give you an estimate on those repairs. If changes are purely cosmetic and extend only to paint, floors, doors, windows and kitchen – then the estimate might be easy to make and it will be somewhat accurate.
If you need to remove walls or repair electric, pluming, or roofing then you’ll be opening a can of worms that can cost you a fortune. Once you open a wall or have to fix electric wiring or replace plumbing you will have to obtain permits, and depending on what you find, it might lead to an endless number of permits and repairs that you cannot foresee without doing major work. These situations are hard to estimate and might eat up all your profits in an investment property so make sure your margins are high.
- Make sure you have good comparables that justify the selling price:
Most times when you are presented with “wholesale” deals you will be told how much is the asking price and based on the comparables they have researched will tell you how much you can sell it for. Well, in my experience, when I run my own comparables I notice that rarely my results match those of the wholesalers. The comparables that are given by the “wholesaler” are many times “cherry picked” with the properties that have sold at the highest price in the nearby area, but are not averaged out with properties that have sold for a low price that are closer by and have sold more recently. That’s why it’s very important that you work with a realtor you trust and can run an objective comparable analysis to make sure you’ll be able to sell for a profit. Whatever you do, don not relay on automated evaluations from Zillow or Trulia; have a real, experienced human being evaluate all the factors.
- Factor in all expenses:
Just because a property is selling for $80,000 under market value it does not mean it’s a good deal. It might be if you’re planning to keep it and rent it for long term or if all it needs a fresh coat of paint, but you need to make sure you do your math right and evaluate all costs before you buy.
For example, if you are offered a property selling at $220,000 with market value in good condition of $300,000 you have to do the following math.
1st, if you want to sell it fast you will need to price it under market value, so lets say you’ll sell it for $295,000.
$295,000 – 2% of 80% of the loan in closing costs = $3,500
$291,500 – 30,000 in repairs
$261,500 — 4 months of paying a mortgage property taxes, etc = 7,000
$254,500 – 17,700 in 6% real estate commission
So if everything goes well, you’ll be making a profit of $16,800 in a period of 3 to 4 months. For most investors this doesn’t make sense, so either find properties with higher margins or lower your overhead by buying all with your own cash or find a title company that will cost you less.
- Buy under a company name:
When you invest in real estate, you will want to make sure that you do it as a business instead of an individual and use a LLC, not an Inc. This will protect you from any liability directly against you.
Renovating and reselling is the major art behind flipping properties. If you want to stay ahead in the market and begin to profit, then understanding the basics of this and how to work as a business with real estate is one of the potential ways to make a living. There are many who have worked with real estate and flipping properties that have had the ability to make a large amount of money off the investments.