Just ahead of the housing bubble, flipping houses was an investor pass-time. As home prices started to rise, many would-be real estate moguls bought houses to flip hoping that the prices would increase enough in a six-month period for them to make a profit. The concept spawned reality TV shows like Flip This House and The Property Ladder.
Many savvy investors saw profits increase right up until the bubble burst. Others, particularly novice investors, became victims of fraudulent flipping schemes and unscrupulous banking practices. Post-housing bubble, investors with lots of money picked up distressed properties for lower outlay, but had a harder time actually selling those homes since potential buyers were more cautious.
The investors that survived the drastic ups and downs of the market had a Plan B. When the housing market crashed and many people lost their homes, the rental market increased. So, investors that planned for if their investment didn't sell by turning it into rental property made it through unscathed.
In the past couple of years, the "flipping" market heated up again. But, as home prices appreciate, and there are fewer distressed homes on the market for flippers to purchase, experienced investors say now isn't really the best time for a novice to start on their own. In fact, many investors learned lessons from the housing bubble and the crisis that ensued from it bursting.
Here are some tips to guide your potential investment:
- Not every markets is profitable: While there are lots of homes that could be purchased, rehabbed and potentially flipped in every part of the country, some placed are not seeing the kind of economic growth that makes flipping viable. You have to know your market, know local values and be prepared to by having deep pockets should the home not sell.
- Do your homework: Since there are fewer homes at the kinds of steep discounts seen in recent years, consider planning to pay full price cash, but arrange for a delay to have the home inspected. If the inspection reveals problems, the buyer can walk away, or make a lower offer to the seller and potentially get a good deal. Just remember that anything revealed during the inspection is now your responsibility to repair or replace.
- Know your margins: unlike the impression you might get from watching the popular reality shows about flipping, the margins to be made from buying and selling a home are not as large as they appear. If you can find undervalued homes, you'll have a cushion you can build into the rehab. If the difference between the purchase price and the new selling price is not as significant, avoid purchasing a home that requires thousands of dollars of repairs and upgrades or you'll end up with a lovely home, but no income from it.
- Learn how to seek out potential houses: Lower inventory means that being able to find a home with the potential to flip is more difficult. Use your network of real estate professionals, estate attorneys and even repair contractors to learn of possible homes to buy.
Watch the trends
Real estate trends up and down. When you're purchasing a home for your family, your motivation to buy is not as affected by those trends as when you're purchasing as a form of investing … especially if you plan to flip it within six months. The trend upward needs to be significant enough for you to make a profit, but not so significant that potential buyers cannot get mortgage approval to purchase it.
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