(This article is not intended as financial advice.)
Buy a house that has a deeply discounted price because it needs repairs, do the repairs, sell it at market value, and reap the profits. It sounds like a simple formula, and many have followed this route to financial gain.
But this formula is not as simple as it may look on television.
The first thing to consider is location. House-flipper television shows take place in different cities and states whose market conditions may vary widely from your locale. When it comes to the sale price a property ultimately commands, location means everything. In researching whether house flipping is right for you, a crucial step is looking at your local market and finding out what prices houses have been selling for in the last six months.
It is also important to find out how much competition exists in house flipping, and how that competition conducts business. Do established house flippers in your area run advertising campaigns to solicit sellers? Do they partner with real estate agents, or do they obtain their own real estate licenses? These are some strategies used by professional house flippers to get a jump on the competition.
There is strong competition for properties that can be flipped profitably. If a house has been sitting on the market for 149 days, this may be a sign that experienced house flippers have a reason for avoiding it. There is a very important distinction to be made between a house that can be flipped profitably and a house that will drain your finances and leave you “in the hole” when it finally sells. Professional house flippers have an understanding of what makes a house potentially profitable. They know the hard facts: that is, what houses in specific neighborhoods are selling for. Wishful thinking has no place in flipping houses for profit.
Let’s say the highest price a particular house can command is $110,000. If it is priced at $80,000, and needs $40,000 of work, will it sell for $120,000? No. Just because more money is put into a house, does not mean we can wave a magic wand and make it sell for more money. Don’t forget that Realtor commissions, excise taxes, and closing costs must also come out of that $110,000. Additionally, if the work done to the house is low quality, you can expect the buyer’s home inspector to discover it, and the buyer to request that further work be done.
Before making any financial commitment, it is advisable to learn if there are any government regulations in your area that affect house flipping. Government programs that deal with foreclosures, which can be desirable as flip houses, typically have separate sets of rules for owner occupants and investors. Also, it is important to consult with professionals such as a financial advisor, CPA, or attorney regarding financial, tax, and legal implications of house flipping.
In real estate, one must always expect the unexpected. There are no guarantees. If a person desires to flip houses, researching the local real estate market is essential to making an educated decision. The best way to do this is asking a trusted friend or family member to refer you to a Realtor they have had a good experience with. A Realtor will provide the best assistance in helping you understand your local housing market.