Are you one of those individuals who are hooked on TV shows like Flip or Flop, Flip that House, House Flippers….? Are you salivating at the thought of following in the footsteps of these successful flippers and get rich like they have? Are you considering flying to Las Vegas to attend a seminar to learn the tips and tricks from the experts?
House flipping involves purchasing a fixer-upper, hopefully at a bargain price, (sometimes using borrowed dollars) supervising or performing repairs, then selling the property, in hopes of ultimately making a profit. If you are destined to be a successful house flipper, you must have knowledge of each of these areas, and have a team of experts who can support you in this venture. Let’s break down the steps:
Purchase- successful flippers often have access to information about properties that are not yet listed for sale. Having an opportunity to make an offer before the property goes “on the market” gives a huge opportunity to get a true bargain. Having a network of professionals and trusted advisors such as attorneys, (probate, estate planning, real estate) and tax professionals can help you to get an inside tip on an available property. Having knowledge about how to research public records is also helpful as this resource can provide a great resource for properties that may be “distressed” and available for a possible bargain purchase.
Prior to purchase, have a home inspection completed by a reputable home inspector. It is critical that your inspector have had actual building experience and not just “book-learning.” A home inspection can and should reveal hidden defects that will turn your project from a dream to a nightmare. Know before you buy!
Borrowing money from conventional and non-conventional sources is critical for most flippers. Have a great banker on your team as well as a great mortgage broker. Many flippers also rely on investors and private lenders. Make sure that you have legal agreements in place for all types of borrowing, investing, joint venture arrangements and partnerships to avoid unpleasant surprises, unanticipated litigation, or broken relationships. Never enter into any type of informal arrangement for financing or investing, and make sure your agreement is prepared or reviewed by an attorney and if appropriate, recorded in the public record. Legal fees and costs for litigation and dispute resolution can ruin any potential profit in your flip venture.
Fix-up. Many flippers rely on their personal skills to perform some of the repairs, and some have no DIY skills. Either way, repairs and improvements must be properly permitted. Make sure you know your own limits and have a trusted network of licensed trades persons who can- reliably, for a reasonable price, and in an appropriate time frame – complete the tasks needed for repairs and improvements.
Sale and profit realization – Are you knowledgeable enough to sell the property on your own or should you use a realtor? Being able to “list” the property for sale and having it professionally marketed will expose your gem to more buyers and may ultimately lead to a higher profit. It is usually best to establish a relationship with a seasoned realtor who can work with you time and again to gain the highest profit. Know your potential profit and tax implications well before closing. Is a “1031 exchange” right for you? Close with a reputable real estate attorney who is knowledgeable about tax structures to help you avoid legal issues and unexpected tax consequences following closing. Don’t attempt a do-it-yourself closing with a self-prepared deed to save money, you will likely pay a high price later for delving into an area that is best left to a highly qualified professional.
Now that you know more – are you still ready to go on your adventure? Knowing the potential pitfalls is important! Property flipping does have its risks but it also can have tremendous rewards and can be a lot of fun! Good luck and happy flipping!