From time to time, we receive questions from clients regarding flipping a house. For starters, what exactly does flipping a house mean? Typically, house flipping is when someone buys a property and holds it for a short period of time and then sells it later with hopes of making a profit. Typically, a home held for 12 months or less and then sold is considered to be a flip. Oftentimes, these are distressed homes that need some rehabilitation and then are able to be sold for a profit. During certain housing markets we tend to see a significant increase in the amount of houses being flipped. For example, we saw significant activity during the period preceding the housing collapse around 2007 – 2008. (As a reminder, that housing collapse was related to the subprime mortgage crisis.) In addition, we also saw another spike in house flips during the 2021 time frame as the market was heated up post pandemic. Flipping houses can be a great way to make a profit, but it’s important to do your research and understand the risks involved. Here are some things to consider before you get started:
Tips for flipping a house
- The market: Do your research on the local real estate market to get an idea of what homes are selling for in your area. You’ll also need to factor in the cost of repairs and renovations.
- The property: Choose a property that is in need of some TLC, but that has good bones. You don’t want to sink too much money into repairs, but you also want to make sure the property has the potential to appreciate in value.
- The budget: Set a budget for the purchase price, repairs, and renovations. Be realistic about how much you can afford to spend.
- The “70 Rule”: If possible, adhere to the 70 Rule. This rule states that real estate investors should not pay more than 70% of a property’s after-repair value (ARV) minus the cost of the repairs necessary to the renovate the property. Essentially, the ARV is the amount that the property will sell for after being renovated.
- The timeline: How long do you have to flip the house? If you’re working with a limited budget, you’ll need to be able to complete the project quickly.
- The contractors: Hire experienced contractors who will do quality work on time and on budget.
- The marketing: Once the house is ready to sell, you’ll need to market it effectively to attract buyers. Hiring a local and knowledgeable real estate agent will greatly improve your marketing ability.
Additional considerations
- Don’t overspend: It’s important to make a profit, but don’t overspend on repairs and renovations. The goal is to sell the house for more than you paid for it, but you don’t want to lose money on the deal. In addition, be careful not to over-improve a property relative to the neighborhood.
- Do your research: Before you buy a property, do your research on the neighborhood, the school district, and any potential zoning issues. You also want to make sure the property is free of any major defects.
- Hire a good inspector: Before you close on the property, have it inspected by a qualified inspector. This will help you identify any hidden problems that could cost you money down the road.
- Be patient: Flipping houses takes time and effort. Don’t expect to make a quick buck. Be patient and do your due diligence, and you’ll be more likely to succeed.
Summary
House flipping can be a lucrative endeavor, however it certainly does not come without its risks. Given the recent run up in home prices and interest rates, it has become more challenging for investors. In order to earn the desired margins warranting the investment, careful consideration should be involved with flipping a house. With this said, according to a recent study by the National Association of Realtors®, 77% of home buyers prefer a move-in ready home. This combined with the persistently low inventory of homes for sale, can still provide opportunity for real estate investors. As a best practice, if you are considering purchasing a project house to flip, it is wise to obtain contractor quotes for estimated costs in addition to your regular home inspection. Of course, this would need to be completed during your home inspection period to still offer you the chance to cancel the contract if necessary. In addition, it is a good idea to research the local rental market to identify a house that could also be easily rented for a respectable amount. Should you not be able to sell the property, renting it out could be a back up plan. Although this is not the ideal outcome, it could alleviate the carrying costs of the property in the meantime until a better selling opportunity arises.
Are you thinking about investing in South Florida real estate? We can help! Contact Natasha at Live South Florida Realty, Inc. today! Also, be sure to download the free Florida Home Search app for your mobile device and have the power of the South Florida MLS in the palm of your hand!
