Flipping houses sounds like such a fun and profitable way to make money. You find a diamond in the rough for a great price, spend a few weeks to a few months updating, upgrading, and making the home look fresh and new, and then turn around and sell it for a tidy profit. Sounds simple, right?
There’s a lot that HGTV leaves out when producing their famous flipping shows. To the average viewer, house flipping looks like a great investment and something that everyone can do. But here’s some truths you may not know:
It won’t make you a millionaire – unless of course you get your own HGTV Show! Most homes don’t sell for tens of thousands in profits. Not only are you paying to purchase the home, but you have to deduct for any material costs, labor, taxes, interest on a mortgage, real estate agent fees, etc. There are no guarantees when it comes to flipping and there is always the risk that you won’t turn a profit at all — and might actually end up sinking money into a house. That’s why HGTV calls it Flip or Flop right – they do actually have some flops.
Be prepared to be involved. It’s incredibly involved. Before you even start, you need to spend time finding the right property and the right contractors to help you out. If you think you are going to flip houses as a weekend project, you might want to think twice. It’s way more hands on than most people think even if you hire contractors. Things happen, issues are found, and your contractors need to get ahold of you to make immediate decisions. The most profitable “Flippers” – are licensed real estate agents and/or have a solid talent when it comes to remodeling and homebuilding limiting the amount of outsourced resource dollars.
No 2 houses are the same. Your first flip might be a home run, or even your second, third, and fourth, but you may end up with a dud on your hands at some point. With many homes it can be hard to tell what’s going on “underneath” until you start doing the renovations and pulling stuff apart. Some rooms may be fine while others have had some DIY work done that isn’t up to code or causes more harm than good. There’s no telling what you might come across when flipping, so if you don’t like surprises, flipping might not be right for you.
You need money. While getting a mortgage for your primary home is a fairly simple process, getting funding for a flip can be much harder. Most lenders require a substantial down payment (often 25% or more for investment properties), plus closing costs, and you still need money for all your renovations.
It’s harder if you aren’t a contractor. If you are already in the home renovation field as your primary line of work, flipping a home is much easier than someone who needs to rely on other people to create their vision and success. You need to hire people who have skills and experience but also won’t cost you an arm and a leg. Cheaper isn’t always better if your contractor causes more damage than good or doesn’t know building codes.
You need to be numbers savvy. Being good at math and crunching numbers is part of the deal when flipping houses. You need to know exactly what your budget is, how to stay on budget, and what costs you can cut if unexpected issues arise. And it can take time to find a property that makes sense numbers-wise. Not every foreclosure is a good deal or a good flip option – you need to make sure you purchase a home for the right price, can do the right updates and upgrades, and can sell to make enough profit to make the project worth it.
It takes time. Buying real estate seems like it’s so simple on TV but purchasing a property can often take at least 30 days from the offer date. There are a lot of steps: inspection, title search, appraisal, acquiring HOA resale documents, mortgage loan processing and approval, and closing document preparation. The coordination of everything takes time.
Your listing price can make or break you. If your house is priced too high, you won’t sell quickly. If you price it too low and get a quick sale, you could be leaving money on the table. You need to strategically set a listing price that helps you sell your renovated home quickly but still make the number you need to get. The longer a home is on the market, the less desirable it becomes, and the less it’ll eventually sell for. PLUS, you need to keep paying the holding costs until the home is sold. Insurance, taxes, HOA fees and utilities accrue each month. Factor in 2 months from listing to closing as the ideal amount of time. You’ll wipe out your profits quickly if you end up sitting on the property too long and have to keep dropping the price to be competitive.
Not everyone can be the next Tarek and Christina or Chip and Joanna. It’s important to know what you are getting into before you decide to purchase your first flip property. We’d love to help answer any of your lending questions. Give us a call or stop into any of our 5 convenient locations today.
Vice President, Senior Mortgage Lender
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