Considerations for the novice property investor…
I have written in prior articles here some suggestions for the novice investor looking how to flip a house and just breaking into the house flipping business. Unfortunately, there will certainly be a great deal of trial and error you’ll have to experience on your path to house flipping wisdom. But pay heed to some of these recommendations, and you should definitely cut down on beginner mistakes. I have noted in my article “The Art of The House Flip” (see http://investinginproperties.org/fixing/the-art-of-the-house-flip/) how at the start, you “should begin by knowing every fixer-upper that is on the market in your local area that you plan to do your property investing. That means not simply combing through Zillow or Trulia for all available houses on the market in your area. It means you must actually tour each and every one that is a viable candidate for your house flip dollars. Make sure you work with one local real estate agent exclusively. They can greatly aid you in setting up automatic searches on their local Multiple Listing Services (MLS) that will generate possible investment flips daily for you to explore.” I also had some good suggestions in that article about the possibility of flipping houses with no money down.
More cogent advice
But wait, there’s more…As part of your house flipping 101 primer, you’ll need to develop some major amounts of discipline. I mean, after all, you will be running your own business! Consider some more advice on this exact subject I have proffered in the same article, when I mentioned that you should certainly “pick a day of the week to be able to tour all the houses that just came on the market that week, that are in dire need of repair. It is these fixer-uppers, where you can invest renovation dollars to earn you profits that you’ll need to zero in on. If possible, and your work schedule allows it, be able to visit immediately new additions to the market that represent tremendous profit potential. Either they are undervalued, or need work that is modest, but will yield high returns for your investment money. Naturally, you also need to do your homework on what similar properties to the house you’re considering flipping are selling for of late (within the last 6 to 12 months only). This is known as knowing the “comps,” or comparable properties. As before, use your real estate agent to help guide you in your research here.”
Pitfalls abound though…
I have also outlined in another article here some of the major pitfalls to be aware of when just getting your feet wet in house flipping. In a separate piece here (you can see the whole article at: http://investinginproperties.org/locating-property/beware-biggest-house-flipping-danger/) I have warned that “from the outset, you’ll need to create a pro forma budget for your real estate investing project. This is the easy part. Acquisition costs, tentative rehab costs, and carrying costs until you sell it need to tallied up. Be sure to be conservative in all areas, and don’t forget to add 10% as an overage factor when investing in real estate. Then, figure on a realistic market value for the property once it’s all fixed up to determine your net income projection.”
When the model for flipping houses doesn’t work…
I have also warned in here about some other major pitfalls that could befall you when investing in house flipping. I have ticked off many possible roadblocks to the novice property investor who’s trying to understand how to flip a house. However, I wanted to note here that one danger in particular should be evaluated prior to getting your feet wet. I’m speaking of the area you choose to do your house flipping business.
I have noted before that location is critical to the success of your house flipping projects. However, this assumed your area met other criteria to be successful. I should note that an aspect as serious as the crime rate should not be the main determinant of your selection of an area…Many geographical regions are in the process of gentrification, and prior poor crime statistics for an area do not necessarily indicate future problems. Rather, you should take in demographic data as a whole for any area you’re considering acquiring a flipping project. If a new access ramp to a nearby highway is about to be built, or if a new local mall is about to be constructed, then indeed, the area may be about to make some major improvements, and be a great indicator of a place to purchase a fixer-upper to rehab and then place on the market soon thereafter.
Be wary of this scenario…
However, there is a model for house flipping that simply does not make financial sense. This occurs when the geographic area you’re considering buying into has low absolute market valuations for houses while at the same time labor costs remain high relative to more affluent areas nearby. Let me give an example. Let’s say the area you want to invest in has an average home sale price in the hundred to hundred and fifty thousand dollar range. Meanwhile a very affluent town thirty miles away has an average sales price in the four hundred to five hundred thousand dollar range. If your budget will only allow you to purchase in the lower price range town, fine. However, if labor costs are roughly the same between the two areas, beware! A hundred thousand dollar renovation project doubles the cost of a hundred thousand dollar acquisition. But after the renovation, you probably will not be able to recoup such a high renovation cost – plus profit – when it comes time to place it on the market. But if you buy a four hundred thousand dollar home, the hundred thousand dollar renovation only represents a twenty percent increase in the valuation – not fifty percent! The flipping houses model needs to keep consistency between areas. Otherwise, you’ll be stuck “over-improving” a property – and most probably, will have to take a loss on it in order to sell it.
Length of time on the market
Also consider the average length of time on the market for homes in the area you’re considering buying into. This is critical. You can get this information from Zillow, Trulia, Realtor.com or your local Realtor…for any given zip code. If you find an area that has an increasing average length of time on the market, be very wary of investing there. In addition, if the area has an average length of time that’s got an average over one hundred eighty days, also be extremely concerned. Your model is based on moving your product quickly – your newly renovated house. If you get stuck in an area where there are too few buyers looking, you’ll then be stuck holding your property for a long time. The longer you hold it, the more your carrying costs will eat into any potential profit when you do sell.
Photos courtesy of askmen.com, cbsnews.com, metrosdrealty.com, foreclosuredatabank.com, barnettassociates.net, fixandflipnetwork.com, gumtree.com