Flipping A House -Windfall or Disaster

Some of the most popular reality shows on television are the ones showing people who buy and sell a house for a profit. And watching one of these shows usually makes you want to charge out there and share in the spoils. However, these reality shows are now explaining the other side.

Buying, renovating and selling homes can be a great way to make money but like everything else you have to know what you are doing. Because, unlike buying and reselling an article on eBay there are so many other considerations on many levels that can come back to haunt you. A lesson in flipping properties is rarely learned cheaply and every mistake adds to the cost that cuts into the expected profit formula. In a lot of cases “flippers” are found frantically trying to sell their remodel while the interest rates are bleeding them dry.

Location

Like any real estate agent can tell you location is “1, 2 and 3” in importance in buying property. Because you can make a home into a palace but if it is in the wrong area who will buy it? If you ask an experienced “flipper” you'll here this, “Buy cheap homes in an expensive neighborhood.” But this is an area where you have to get experienced help.

Hire A General Contractor (G.C.)

A lot of people who flip homes can accomplish a remodel without a general contractor. This comes from watching and learning from a G.C., learning from an experienced colleague or learning the hard way. In any of the examples the keyword is “learning.” Home remodeling is a skill. That is why G.C.'s have to go to trade school and tested for a contractor license. They know the building codes and can go through a set of blueprints and have a ballpark price in a short time. So, if you are a first timer it pays to consult with the G.C. before you buy the home. Hire him or her for an afternoon and go through the home you intend to buy and fix up. This expert set of eyes will explain the renovations needed and can cost out the whole remodel before you put in an offer. It's well worth the money.

Timeline

Even with the right contractor and the right home at the right price in the right neighborhood there is always the time factor. Ask yourself, “How long can I make the mortgage payments on this home before I run out of operating capital?” In other words when is it crunch time?

General Contractors are professionals but there are many things out of their control: weather, manpower shortages and late supplies. And this is just in their control. The subtrades they contacted may have their own problems that parallel the G.C. For example, you can't do many landscaping jobs, do the roof or lay bricks in a heavy rain. And each delay affects the next step in the project and slows everything down. Give yourself a well-padded war chest because your contractor may take longer to finish the project that originally quoted. In addition the house may sit for a while. Your friend's flip might have gone in three weeks but there's no good reason to believe that your project will sell that quickly.

Stay With Your Budget

The first thing is to do is to take the G.C.s budget and add 10%. This combined total is now your “real budget” because it is now adjusted for an unexpected increase in the price of some materials and adding extra labor, etc.

However, a mistake often made is that, first, they don't add the10% and, second, they play around with set items in the budget. For example, modest kitchen cabinets and laminate countertops are budgeted at $5,000. However, the resellers later learn that upscale cabinets and granite countertops will get them triple the money back for the cost and that the home will sell more quickly. So the total cost is now $14,000 and they are $9,000 over budget. Going further, they upgraded the appliances and the kitchen is now up to $12,000. And putting down hardwood instead of laminate tile in the living room jumps that up to $16,000 over the  budget.

But wait a minute, that's $16,000 on top of the 10% they forgot to add to the real budget. If the original budget was $50,000 now they may be on the hook for over $21,000 ($16K + $5K). Now they have to go back to the bank for more money – if they can get it - and their cushion for paying interest in case the home doesn't sell right away, along with their profit, just got smaller.

Hire A Realtor

We've all heard the same line before: “My brother, Bob, sold his house by putting a sign out and didn't have to pay the $5,000 real estate fee!” This is definitely not the norm. An experienced real estate agent usually has a list of people looking for specific properties in certain areas and might have one ready to buy. This is an optimum opportunity for the buyer because they can pick out colors, appliances and other changes while (paid for by the buyer, of course) and the place might close before the renovations are over.

In most cases the home will site one to two months before closing. However, if you sell it yourself you may have only one sign and a newspaper ad. If you have real estate agent you have the whole company's marketing power plus the multiple-listing service where other agents can bring their clients in for viewing.

Take Your Time

Yes, there are great times to get into the market for a flip. But that doesn't mean you have to rush even if a real estate agent is pressuring you. Remember, there is a lot to gain but, as well, there is a lot to lose so take your time and do the math.

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