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Flipping Houses - Some Strategies


It is time to update this page for 2012. Flipping houses for a profit is not as common as it was when the article below was first published, but it is still done. In the past, the flipper had rising real estate values to help him out--something which cannot be counted on at the moment. In fact, with prices still falling in most areas of the country it is important to flip those homes quickly.

Just buying cheap and selling for more is one of four strategies covered here--perhaps the one least likely to work in today's market. Fortunately there are three more ways presented here as well.

1. Buying Low and Selling High

It's a strategy that sounds simple enough, and it was almost easy at the height of the boom a few years back. With this strategy repairs and improvements are minor or just not done. The whole point is to buy cheap enough to sell quickly at a profit. When real estate was appreciating by 20% annually in many cities, this was an easier thing to do.

Those 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.

What has changed in recent times is that there are more and more foreclosures coming onto the market, making it possible to try this method once again. In Florida, for example, there are many condos which the banks own. They have their own reasons for needing to dump these properties fast (regulations require it to some degree, and they lose the ability to lend as much when they have liabilities like owned real estate). So it might be possible to buy a condo for $60,000 which has a value of $80,000 without doing much to it.

2. Flipping Contracts

A 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. This too, is much less common since prices have been falling.

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

A friend invested in fixer uppers in the 1990s, buying and selling fourteen houses one year. He never lifted a hammer or raked a yard--nobody can handle more than a couple homes each year when doing the work themselves.

He made less per house, on average, than some others who were flipping houses, but he certainly made more money total on fourteen homes than a do-it-yourselfer could make on two or three per year. He 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

Other Changes in 2012

There is another aspect to flipping houses or condos in 2012. There are currently more short sales than straight foreclosures. These are sales in which the bank agrees to let the owner sell for less than the loan balance due, and to write off the difference. These can get tricky and they typically take several months to negotiate and close. But that trouble scares away typical buyers, keeping prices down.

Keep in mind too, that banks are not thrilled with investors stepping in and buying cheap just to flip a house for a profit. You might have plan to rent the property for a while before selling, or even live in one of the homes you buy in this way. Renting for a while can make sense in any case, if you are in an area where prices are starting to rise or sales are picking up.

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Houses Under Fifty Thousand | Flipping Houses