House Flipping: Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. Though flipping can apply to any asset, the term is most often applied to real estate. Under the "fix and flip" scenario, an investor or flipper will purchase a house at a relatively low price. The discount may be due to the house's condition (i.e., major renovations and/or repairs needed) and in some cases due to the owner(s) needing to sell a house quickly (e.g., relocation, divorce, pending foreclosure). The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price. Credit: Wikipedia
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We’ve all seen the television shows. Experts and non-experts alike, trying their hand at real estate investment. Television shows the possibilities of buying low, investing and pocketing thousands and thousands of dollars. That certainly sounds sexy doesn’t it?
Sadly, if you are thinking that your own foray into the house flipping business is going to be neatly wrapped up in a 3-part series, you may be in for an unpleasant surprise. Now I would never discourage anyone from doing it. Never. I for one think that, in the right market, it can be a life learning experience. You win some, you lose some but you always learn from it.
Before diving in, let’s consider the EVERYTHING. In this case, if you answer yes to the following questions, it’s a good thing.
- Are homes in the area selling at a rapid pace?
- Is the ratio of buyers higher than those of the sellers?
- Is this a seller’s market?
- Is the home in a desirable location?
- Does the home CURRENTLY appeal to prospective buyers? **
** What does this mean?
If this is a family oriented development for instance, a 2-bedroom home will not likely appeal to prospective buyers with large families.
If this is an older, mature development you may have lost the interest of the urban professionals.
Catching on?
Test # 2 – If you answer yes to these questions, it’s NOT such a good thing.
- Do you plan on using your current home’s equity to finance your flip?
Be careful here. Unless your current home is paid in full, you will now be paying two mortgages. Your equity is now maxed out or capped, depending on how cautious you are. You have no way of knowing when the 2nd property will sell. What happens when your well thought out budget goes south? When the house holds more surprises than you bargained for? Remember, you are now legally responsible for this home and any surprises found are now your responsibility to fix prior to selling. No hidden defects allowed.
- Is your current home for sale at the same time?
Whooo boy. Loaded question huh? How long has it been on the market and why hasn’t it sold?
Consider this: You current home is not selling for a reason! Current Market? Location? Size? Interior Finishes? General Overall Appeal?
And now you are taking on another property. Market, location and size are out of your hands and you know that. So you wouldn’t buy another similar property. Correct?
Interior finishes and overall appeal are fixable. Prior to starting the investment property take care of the one you already have. There is money to be made here too! Hire a home stager and get the changes done. You will get your money back!
- Is this strictly an investment property or will you be living there during the sales process?
Be aware. Be aware of the implications of both. Education is key. In either scenario the tax man will want his cut so do consider that when considering your profits.
You have weighed the pros and cons (believe me, only a few have been listed here), found the property and are diving in. You have therefore had the house inspected (a must!), hired the professionals, created a solid building plan, attained all the necessary permits, established a timeline and a very strict budget to adhere to. Fantastic!
Because you have researched and researched you now know that:
- Handy, do-it-yourself type buyers can only carry out cosmetic changes.
Tip: Do not cut corners. If you have never painted or installed ceramic, this is not the time to start. Hire a professional; it will save you time, money and a lot of frustration.
- Structural changes, building additions, electrical and plumbing must be performed and signed off by licensed professionals. This protects both the seller and buyer. No exceptions.
- Your biggest investments and therefore biggest returns will occur in the kitchen, the washrooms, the now-to-be-finished basement, and the flooring.
- You have hired a designer to assist you, at least part time. A designer can tell you the most cost effective way to update the home. A designer will tell you that the cupboards do not need changing, only the doors (you just saved 8-10K). The designer will get you the doors at a lower cost. A designer will help implement an interior palette to suit the masses. The personalized home will not sell ~ the depersonalized home will.
- You are hiring an experienced agent to view the property before and after. Having seen the property in its non glorified state, the finished product will be that much more impressive.
- Should you decide to sell it on your own (“private sale”) you have already budgeted for marketing the property (professional photos, mailings, proper signage, newspaper ads, etc). This is not the time to cheapen the deal.
- You know you cannot show the property in an empty state. 95% of buyers cannot envision their furnishings in an empty space, you have to show them yourself.
- You have all the legal paperwork on hand during showings in order to accept offers. Private sales are intimidating to the average person. There are computer programs available at most big-box bookstores. They are legal, binding documents made specifically for private sales. If you are selling in the province of Quebec, there is a specialized program available just for you. Have these papers on hand every time you show the house. It only takes on visitor to say, “How do we go about buying this house?” Be ready.
Education, research, assistance and perseverence will pay off. If you are ready to take that plunge, then dive right in and many successes to you!
Are you currently working on your own flip? Would love to hear from you.
