Despite improvements in the housing market, there are still plenty of foreclosed or bank-owned properties ripe for house flippers--professionals who purchase distressed properties to renovate and resell. According to RealtyTrac.com, an online marketplace of foreclosed properties, investors flipped close to 100,000 homes in the first half of the year, making almost $30,000 per flip, on average.
However, experts warn that house flipping isn't as easy as it looks on TV. "You gotta be careful, really do your research, and know what you're doing," says Mike LaCava, a real estate investor outside Boston who founded the House Flipping School to teach others about the trade. Spending too much on repairs or on the property itself means losing money, as does choosing the wrong finishes or general contractor.
[In Pictures: 10 Ways Your Home Can Pay You Money.]
Here's a look at the best practices of successful house flippers, as well as tips on avoiding common pitfalls:
Look for potential. Flippers often invest in properties that don't appeal to conventional home buyers, since they know how to look beyond an outdated kitchen or moldy basement to spot potential. Chaz Shively, founder of New Alchemy Ventures, a real estate investment company in Denver, says, "If you walk in and it smells like somebody had 30 cats in there, it means there's opportunities to improve the place." House flippers typically find deteriorated properties through auctions or relationships with local real estate agents.
Do the math. Many house flippers focus on single-family homes because they appeal to more potential buyers. Plus, the financing on multifamily homes is more complicated, because mortgage lenders have stricter criteria for those. Either way, comparing the purchase price of the property to the after repair value (ARV) is critical. Flippers only earn a profit when the ARV is higher than the original purchase price plus repair costs, so accurately predicting repair costs and the ARV can make or break a deal.
The ARV is derived from similar properties sold in the area, says Peter Souhleris, cohost of Flipping Boston on A&E and cofounder of CityLight Homes, a Boston house-flipping company. "You have to know your market and compare apples to apples," he says. "A lot of novice flippers really want the deal to work, so they'll fudge the number of bedrooms. If you go in and start speculating, that's where you can get hurt." When calculating the ARV, Souhleris and his business partner and cohost Dave Seymour build in a 10 percent buffer for miscellaneous costs, such as attorney fees, taxes, and commissions.
Assemble a team of experts. Successful flippers know their strengths and aren't afraid to tap other experts, especially technical workers like plumbers and electricians. According to Shively, some novices "understand the cosmetic side of things, but they miss the fundamental structural elements like roofing." (For example, never buy a home with a flat roof in Denver, he says, because it snows a lot.) Shively recommends having the sewer line checked by a professional before purchasing a property, as sewer issues can be costly to fix, and soliciting multiple bids and references from contractors to help ensure the job runs smoothly. Building relationships with local real estate agents can also be useful for finding properties and getting accurate ARVs.
Design for buyers, not yourself. Selecting cabinets and paint colors for a flip is different from decorating your own house. The design elements need to appeal to a broad group of potential buyers. "We try to be conservative in our color selections," says LaCava. "We try to keep it basic like an antique white. When we go to a little higher-end home, we go with features like when you close a drawer, it won't slam, and nicer crown molding on the cabinets." Installing features that buyers in the area want, like a wall-mounted TV, higher-quality cabinets, or a built-in wine cooler, can make a property stand out and sell more quickly.
Don't put it on the market too soon. "A lot of rookie people are in such a rush to get a property on the market, and it's not ready yet," says Doug Clark, a house flipper in Salt Lake City and cohost of Flip Men on Spike TV. "I used to do it and every time I did it, I started feeling like a builder, getting all these special requests from buyers. Wait until the absolute end, when it looks right, smells right, and it's staged with furniture."
Get a good, qualified buyer. If a buyer falls in love with the property but can't afford the mortgage, you'll waste precious time, so it's a good idea to get pre-qualification from a reputable mortgage broker. "Get to the point of sale knowing the person you're selling to is qualified to purchase the property," says Seymour. "Otherwise, that slows down the selling time, and it seasons the property on the market. It makes the whole project stale, and people start looking for price drops." Plus, the longer a property sits on the market, the greater the likelihood that profits could get eaten by carrying costs.
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