What makes a property a “flip”? As a general rule, a property that is bought and then sold again within 180 days is considered a “flip”.
Are you a “flipper”?
Our main strategy for real estate investing is to buy and hold, not sell, properties. Over time, the dividends you reap are huge. However, for short term cash infusion, flipping can definitely help your bottom line. Buying with a great discount, often the result of a short-sale or foreclosure, then renovating as needed and reselling quickly for profit is a good way to bring in cash to protect those long term holds.
However, buyer beware. In today’s economy, we’re finding increasing problems with flips. For example, a few years ago, we could buy, renovate and resell a home all within 90 days. Sweet! Kind of like the flip-it shows on TV. Now it’s a different story:
- Today, because of all the foreclosures and short-sales on the market, it’s hard to sell at a retail price. It’s even hard to sell at 10%-15% below retail value. Why? EVERYONE wants to buy at a discount, even if you’ve just spent a ton renovating your property. In the current market, you must buy well below market value in order to fix up a property, re-sell it at a discounted price, and still make a profit.
- It’s harder and harder for buyers to qualify for loans so there are fewer qualified buyers for your property. When you do find a qualified buyer, it is harder than ever to get them all the way to closing. Why? Lenders are far more cautious. They’re requiring more and more documentation from your buyer. I can’t say that I blame the banks for not wanting to lend; with interest rates as low as they are, banks don’t have much financial incentive to make loans.
- We all know it’s more difficult for buyers to qualify. What you may not know is that it’s also more difficult for sellers to sell. From the seller, lenders are often asking for proof (a list) of improvements made on the property (if your profit is more than 20% of your purchase price), more than one appraisal, more than one inspection, verification that the work was done by licensed contractors, and copies of permits.
With all of these additional requirements, you can see why flips can take 180 days (and longer) where they used to take 90.
Flips remain a great alternative for bringing in fast cash, just be aware that your costs will be higher than in the past, your profit margin will be lower, and the time frame for turning a flip is much longer.
If you haven’t yet done a flip, rather than getting your education from the TV flip-it shows (which can be very costly), find a coach guide you through your first one or two, a coach who’s done flips successfully.
What’s been your flipping experience?