This biweekly sponsored column is written by the experts at Gordon James Realty, a local property management firm that specializes in residential real estate, commercial real estate and home owner associations. Please submit any questions in the comments section or via email.
Reality shows, speaker circuits, how-to courses and book deals hype the dream of buying a house with improvement potential, revitalizing it and selling it for big profit. How much easier can making money be? According to these “experts,” one house can return as much profit to the savvy investor as an annual salary.
Of course, in reality, flipping houses is more involved than it appears. Prudent investors will exercise due diligence before spending a single dollar. They’ll also consult true industry experts, home inspectors and contractors to provide evaluations and cost estimates to compare against possible returns.
One of the biggest hurdles for first-time flippers is to balance the cash needed to buy the house with the cash needed to fund the rehabilitation. It is a big consideration and requires professional consultation to make a sound, profitable decision. Just consider the disclaimer for the A&E reality show, Flip This House: “Do not try this at home. It is for trained professionals. You will lose money.”
The difference between a flip and a flop
You are good with tools, have a flair for decorating and found a terrific bargain in an up-an-coming neighborhood – all the formulas for the perfect house flip. It is a no-brainer, right? So, where is the wrinkle? There are plenty of underlying considerations to evaluate before gambling on restore-resell investing.
- Location — This can make or break the deal for potential buyers. Newer neighborhoods are attractive but usually come with higher purchase costs. Look for neighborhoods that are nearly complete. It is very difficult to compete with builder incentives for brand new homes when you are selling a previously occupied home. Good bargains may be found in situations where a builder abandoned the development and a house needs to be finished. Older neighborhoods on the cusp of revitalization also present good opportunities for aspiring flippers, but may require more skilled repairs and modernization.
- Foreclosures — Many buyers interested in flipping a home look to foreclosures. Remember, if an owner couldn’t afford to pay the mortgage they probably couldn’t keep up the maintenance on a house. A foreclosed property may present a number of challenging — and costly — underlying issues for investors.
- Neighborhood crime — Crime not only affects the appeal of a house to potential buyers. It also affects the restoring and reselling process. Empty houses make a prime target. Theft, vandalism, drugs and squatters can add thousands of dollars and hours of time to the process of restoring a property for resell.
- Relative market value — An important consideration in restoration planning is the aggregate value of the neighborhood. According to experts, over-improving for the market is a big mistake house flippers make. If the average home in a residential area sells for $100,000, it isn’t wise to invest $100,000 in remodeling and upgrades anticipating a $250,000 sale. You’re unlikely to find a buyer willing to spend that much, and if you do, it will be tough for them to obtain a mortgage for overvalued property.
- Contingency plan — There is an old saying that any plan is only as good as the backup plan. This is especially true for investors looking to flip a house. Beyond the initial purchase and reconstruction costs there are ongoing mortgage payments, insurance, utilities and other costs of keeping the house in the event it fails to sell quickly. Many investors rent homes out for income until the market improves.
Restoring and reselling may be a great option for getting in to real estate investing for future financial gain, but, as with any speculation, a prospective buyer should first invest the time and effort to do necessary homework on the deal. Assemble a team of trusted experts: a lawyer, accountant, real estate broker and contractors. Despite the implication, flipping a house may not mean a quick profit. But with diligence and some good old-fashioned elbow grease, it is possible to come out ahead.
The real estate professionals at Gordon James Realty are experienced in all areas of real estate investment. With more than 30 years of combined experience, they understand the complexities of the market and can help with your property investment opportunities.