Wednesday, July 22, 2015 / by Bill Berning*
With countless TV shows providing a glamorous look into the world of flipping homes, it’s no surprise that more and more people are showing interest in this portion of the real estate world. However, do the benefits of flipping a home outweigh the sometimes hidden costs that trip up novice flippers? To answer this question, here’s an in-depth look at the subject from some of the most knowledgeable members of the online realty community.
Embracing your entrepreneurial spirit and taking a stab at a spot in the world of real estate can be the start of something truly exciting. Unfortunately, getting in over your head by trying to flip a home that’s not worth the work can negate these good vibes and leave you taking a major financial hit if you’re not careful.
Ever wondered what it’s like to flip homes and chase the substantial profits that come with this approach? While there’s plenty of excitement and potential found within this system, there’s also just as much risk. Before you reach out to your realtor and start picking up real estate assets to add to your portfolio, take a moment to delve into this cost-benefit analysis of the home-flipping process.
What Exactly Constitutes Flipping a Home?
If you’re especially new to this concept, it’s important to lay the groundwork with a strong understanding of what goes into flipping homes. As Lisa Smith of Investopedia explains, the goal of house flipping is to purchase a home at a cost that’s below its market value, then turn around and sell this selection for a profit.
Made popular in the early 2000s, flipping houses has become a cultural phenomenon of sorts with large swathes of the Internet and TV shows turning this process into a media sensation. In some cases, home renovations and upgrades also enter the picture as a way to add value to the property and make it more enticing for potential buyers.
Understanding Where Flippers Fall Short
With this simple goal of getting more out of the home than what you put into it leading the way, flipping homes should be a pretty straightforward affair, right? Unfortunately, this dangerous line of thought has grounded the dreams of plenty of homebuyers before they ever even had a chance to get off the ground.
In their look at the hidden costs and shortcomings of new house-flippers, ABC News’ Kinga Janik and Lauren Effron point out there are a few recurring themes that continue to plague these members of the real estate community. At the top of the list is failing to get the home inspected.
By skipping the part of the process where an expert comes in and gives the home a thorough review, you open yourself up to a variety of unexpected risk and potential expense. This in turn makes staying on budget unnecessarily difficult. Additionally, failing to get the right permits and licenses to fix up these issues continues the theme of getting tripped up by home-flipping paperwork and can easily put you in hot water with your local government.
From a bigger picture perspective, failing to research the neighborhood and the contractors who handle the necessary renovations and upgrades also serves as a stumbling point for many flippers. It might not seem like that big of a deal initially, but ending up with a property that’s otherwise fine – but ultimately undesirable thanks to a rough neighborhood – or a contractor who takes the money and run, constitutes a catastrophic failure that could have been avoided with a little research and foresight.
Is It Still worth the Risk?
At this point, it’s safe to say that flipping homes is in fact a risky proposition for the uninitiated. However, that doesn’t mean that it’s not worth considering if you understand what it takes to be successful. As the team over at First Bank note, if you’re willing to put in the time and effort needed to flip a home the right way, you can expect to be handsomely rewarded for your hard work.
Successfully flipped homes serve as an excellent source of revenue – from both a short and long term perspective. If you’re able to stay on budget, selling a renovated home can net a substantial one-time gain at closing. For those that are open to the idea of renting out the home, this property can serve as a steady stream of income that continues to pay you back for taking on the upfront costs and risks that come with flipping properties.
Outside of the financial boons that come with this process, these experts also point out that flipping homes can be a rewarding and enriching endeavor. Whether you’re a new retiree who wants to try something different or an energetic, “hands-on” type of person who’s looking for a new challenge, seeing this home transform into a valuable asset provides a sense of achievement that only comes from working hard toward – and capturing – a lofty goal.
Building a Winning Strategy
Now that you understand that flipping homes does come with a series of costs and concerns that might not always be readily apparent, but that the process can be rewarding on many levels, it’s time to talk about how you can build a winning strategy. According to William Bronchick, J.D., of the investing news source CRE Online, it all starts with properly evaluating the situation in front of you.
Is it better to flip the home in question “as is,” or should you renovate and upgrade the property before putting it out onto the market? Securing the help of a real estate agent who understands the nuances of the local real estate community can help make these and other vital questions far more manageable as you acclimate yourself to the home-flipping scene.
From here, connecting with licensed and bonded contractors ensures that you steer clear of illegal practices and scams. Aside from keeping you on the straight and narrow, building these relationships now could set you up for more favorable arrangements and reduced pricing down the road; something that’s definitely worthwhile if you intend to regularly flip homes on a budget.
By putting everything you’ve learned here to good use, there’s nothing that can stand in your way as you begin to evaluate and purchase “flip worthy” homes. All that’s left now is to get out in your community or connect with your agent and start looking for the next great real estate opportunity in your area.