Flipping Houses - Some Strategies

Flipping houses for a profit can take a few different forms. The typical idea of just buying cheap and selling for more is the one of four strategies covered here. Of course it is the least likely to work in today's market (I'm writing this in 2009). It's the first one below, and although you may find what I have to say discouraging, read on. There are three more ways that follow it.

1. Buy Low Sell High

Buy low and sell the house for more - it's a strategy that sounds simple. When using this strategy repairs and improvements are minor or just not done at all. This was actually a common plan in many areas a few years back. Those were the days when real estate was appreciating by 20% annually in many cities around the country.

Quickly rising prices help because you don't add much if any value to the property in a "straight flip." You have to make your profit by buying below market, sometimes relying on the ignorance of owners. This type of "investing" isn't always appreciated by the public, as you might imagine.

The transaction costs of buying and selling can eat up 10% to 15% of the final sales price, making it difficult to do this in the best of times. In a tough market like we have now you might find a house for 20% less than what it's worth and still only make a small profit. Even that requires that you sell it before holding costs eat up those profits.

2. Flipping Of Contracts

Another common practice a few years ago was flipping houses by selling the contracts. You make an offer, then sell your position to another investor for a few thousand dollars. For an example, let's suppose a home has a potential $30,000 profit after repairs, based on the offer that you made and that was accepted. Another investor who does the repairs might buy your position (the contract) for $5,000. He still can make $25,000 if you estimated correctly. Meanwhile you risk almost nothing if you do this right.

Even having cash to invest isn't really necessary for this strategy, other than perhaps $500 for a good faith deposit (also called "earnest money"). As long as you leave yourself a way out in the contract you are relatively safe. Naturally you need to have the right to assign it to another investor as part of the original contract.

3. Flipping Houses With Sweat Equity

Many first-time investors think of this strategy when they consider flipping a house for a profit. You just find a run-down home, buy it cheap, and start spending all your free time painting and repairing. Maybe you'll be done in a few months, sell the house a few months after that, and make $20,000.

This can be a valuable experience for a first investment, since doing everything yourself teaches you the costs of repairs and improvements, and the basic process as well. It can also be a way to reduce your risk a little bit by reducing costs. For example, you could end up making only $7,000, and maybe you would have lost money had you paid out $12,000 for others to do everything.

Of course if you only made $7,000 that may be less for your labor than a pizza delivery driver makes. In that case you bought a job, not an investment. Also, since it takes more time and you can't work on many projects at once, doing everything yourself always limits what you can make. After you get some experience then, you should consider flipping fixer uppers using a more business-like strategy.

4. The Business Of Flipping Houses

Years ago a friend invested in fixer uppers. He bought and sold fourteen houses one year. Of course he never lifted a hammer or paintbrush. Who could handle more than a couple homes annually doing the work themselves after all?

It is true that he made less per house, on average, than some others who were flipping houses. On the other hand he certainly made more money total on fourteen homes than a do-it-yourselfer could make on the two or three per year they might manage to do. He always had a good team of contractors and others busy preparing one house while he spent his time finding the next profitable project. You make it a business by delegating like this. Then you are an investor rather than a handyman.

Another page to check out:

How to Sell a House