Happy July! We hope you had a terrific Independence Day. It is officially the summer season. We hope you are having a good summer so far. Our housing market is robust. I received several questions about house-flipping. I will share with you the basic concepts of housing flipping in this month’s “House Flipping 101”.
Q: How does house flipping work? What do I need to get started?
A: There are different types of house flipping. In this article, I’ll focus on the standard model of buying a fix-upper property, renovate it, and then resale it for a profit. I’ve worked extensively in Orlando area with house flippers in the past. I will share the basic concepts below.
1. Money: The best opportunities in flipping homes for profit lie in the true fix-uppers. These properties are not going to pass inspection and secure financing from banks. So, flippers need to have cash to buy the property. Then they need additional cash to renovate the home. Only when the home is finally resold, do they get their cash investment back (plus profit).
· Own money: Many flippers use their own money. I’ve worked with flippers that use an equity line of credit on their home to fund their house-flipping ventures. I’ve seen a few partners pooling their limited funds into a workable sum.
· Other people’s money: Some flippers borrow money. These are short-term, high-interest “hard money” loans. An example is 15% interest for a 6-month loan. This allows 3 months for renovation, and 3 months for marketing and selling of the home.
2. Acquisition of property: Finding the right property, and buying it at the right price, is a critical part of the whole process. The expertise and comfort level of the flipper will dictate the extent and scope of the repairs and renovation that should be undertaken.
· Fix-upper properties can be found on the MLS, foreclosure auctions, and door-knocking to find prospective sellers. I’ve worked with investors exclusively through properties listed in the MLS. These listed properties have clear, marketable titles. Other investors groups may participate in auctions and direct solicitation. The caveat of acquiring properties through auctions is to be careful of properties without clear title. A certificate of title does not mean you have clear title.
· Inspection is critical. This is where the house-flippers map out the extent and scope of work required to realize the vision of the renovated home. The estimate of cost will dictate how much one can pay for the property. The inspection should also include a permit search. I’ve seen properties that were built without proper permits. The buyer of a property essentially inherits all the problems of the property.
3. Renovation: Some consider this the fun part. Some flippers do the work themselves, while others subcontract out various projects. One must make sure the work is done properly, and with necessary permits. Otherwise, the Florida disclosure laws and buyer inspections may make resale challenging.
4. Resale: When the property renovation is complete it is ready to be listed on the market. I’m often impressed when I first see the “after” look of the prior fix-uppers. Usually in the latest style and colors, outfitted with the latest fixtures, these renovated homes can be a pleasure to behold. I had fun listing them, and I saw the excitement of buyers who would be living in them.
For a house-flipping project to be profitable, you need to execute many steps correctly. You can’t overpay for a property. You can’t miss problems with the property or underestimate the cost of repair. You must manage the renovation budget and timeline tightly. Lastly, you need to market and price the finished home properly in order to sell it at the highest price in the shortest time. Hopefully, after paying all expenses (and don’t forget taxes), you will have a nice profit!
In the hot housing market of the last several years, the challenge has not been with selling the finished the home. The challenge has been finding the right properties, at the right price. Much of the competition is among house-flipping groups themselves. In auctions and open market, they bid against one another for the properties. The well-run groups with proper knowhow, good discipline and management, can make a project profitable whereas a less experienced group might lose money.
This is just a basic description of the house-flipping process. If you want to find out more, we are available for consultations.
As always, if you are planning on buying or selling a home in 2018 (or even 2019), it’s never too early to have a conversation with us. Many of our clients today started planning with us last year!
Give us a call if you have questions, or know of someone we can help!
Until next month, take care!
Yien and the Yao Team.