House Flipping: Is It Too Risky?

House in Toronto by Martin Cathrae
House in Toronto by Martin
Cathrae

House flipping is the perfect investment with the potential for high profits. But like every high-profit investment, it involves high risks. “The masses believe in the dream that’s been promised to them, that they will be making a fortune in the next six months,” says Manuel Iraola, president of Miami-based Homekeys.net, an online real estate company for MSN Real Estate. “They don’t have the basic know-how. If it were as easy as they make it seem, 286 million people would be flipping real estate.”

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Flipping used to be a popular real estate strategy before the U.S. housing collapse, and now, after the crisis and with a recovering housing market, it is coming back into fashion.

What is It?

House flipping is a type of real estate investment strategy in which an investor purchases a house with the goal of reselling it for a profit. Investors can renovate the house and increase its value. Many flipped houses are bought in foreclosure or in estate or similar sales at a bargain, with the intention to quickly sell the house at market price or the best price they can bring from the property without making any special investment.

Great Strategy or Just Luck?

House by Loozrboy
House by Loozrboy

If everything goes well, an investor can make a substantial amount of money in a very short time. James R. Hagerty describes Jon Mirmelli’s investment: He learned late in the morning that a never-occupied custom house on the northern fringes of this Phoenix suburb was going up for auction in the same day. He won the home for $486,300, and one week later, he sold it to a migrant for $690,000 (141 per cent). It seems to be easy: wait for a really cheap house, buy it, find a buyer, and gain a remarkable profit. And if you are lucky, yes, it is easy. However, flippers can’t rely on luck — they have to know.

What a Flipper Needs

1. Money

This includes the property acquisition cost, property holding costs such as taxes and utilities, renovation costs, and capital gains taxes. The profit doesn’t come from the difference between the purchasing and selling price. There are more costs that have to be added to the equation. The flipper has to be sure that he will have enough money to cover all the costs and to sell the home at a higher price than the sum of his costs.

2. Time

It could just as easily take months to find a buyer as it could take a week. Before selling, the flipper needs to schedule inspections to make sure the property complies with applicable building codes. If it doesn’t, she will have to spend more money and more time, and she still won’t know whether it’s worth the effort. A more ordinary job probably couldn’t bring in as much money, but the risk wouldn’t be involved.

3. Skills

When a flipper decides to renovate the house, he should do so by himself as much as he can. If he can’t repair the roof, he has to pay a professional to do it, and each job contracted out increases his costs.

4. Knowledge

Documentation by Joel Penner
Documentation by Joel Penner

Buying and selling require a lot of documentation. If a flipper wants to get a high profit, she has to know the neighbourhood of the house to predict the selling price, the legal and economic background, and housing demand in the country and area. Otherwise, she could find herself trapped with a home she doesn’t want, unable to sell it without losses.

If you decide to try your hand at flipping houses, remember that as with any other business, flipping requires a lot of knowledge, good research before taking action, and patience. Sometimes even a low profit is better than losses, and sometimes it is worth waiting for a better offer. Don’t decide in a hurry, but don’t hesitate too much.

So where can you find the ideal compromise? Do your research, because only a wealth of information and lots of practice can give you the right answer.

One Response

  1. Yusuf

    Hi there, interested in flipping homes. I’m from Hamilton, I would like to purchase under 450 and improve the home enough to capitalize on the sale. My direct line is 9059812255. Please email what you may have along with any thoughts of other potential areas or renovation type properties available. Thank you and hope to hear from you soon.

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