5 Things to Know About Flipping Houses
About the author: Freelancer and blog writer Reese Jones believes that financial freedom is something that is attainable for almost everyone, regardless of current debt or credit status.
When you consider all the things you need to know about flipping houses—be as prepared as possible. If you want a chance at success in this type of real estate investing, do plenty of research about the processes, the market, and the industry–especially when you are flipping a house for the first time. Find experts to consult, network in your community, and utilize social media, podcasts, and books.
Like most business endeavors, there are always outliers and other factors that can affect your goals that you may not have considered previously. So, in the spirit of being prepared, let’s talk about five things that could negatively impact your house flip and how to prevent them from derailing your project and potential profits.
Disclosure from banks
Many homes bought by flippers are foreclosures sold by a bank below market value. This is how some flippers can find bargain deals on homes that are neglected and aren’t being maintained. But that neglect has the potential to cost a fortune. While regular seller-to-buyer transactions legally require the seller to disclose all known problems, banks aren’t required to disclose anything to you, and you may not have the opportunity to walk the property at all before making an offer. So, if the price appears too good to be true, be wary, because you could be inheriting costly problems that could eat into your flipping profit.
How to avoid: Foreclosures have the potential to provide a great deal, but for a potential first flip, find your real estate investment leads through another source like MLS listings, your networks, websites, social media and other creative methods. Or, if the foreclosure is too good of an opportunity to pass up, see what forms of home inspections you may be able to pull off before fully committing to the transaction.
Hidden or unexpected costs of closing and capital gains
On average, you’ll pay 5% to 6% of the sale price of a flipped home to real estate agents managing the transaction. Say you bought a house for $250,000 and flipped it for $300,000 a few months later, $18,000 of that $50,000 gross profit is already gone. Additionally, if you’ve owned the home for less than a year, you’ll be taxed capital gains at your regular income tax rate rather than the capped 20% rate. Your capital gains will most likely put you into a higher tax bracket when combined with any other income you made that year. This is different from what a lot of people expect when selling a home that they have lived in for 3+ years and they are able to earn up to $500k in profit without paying tax.
How to avoid: Plan ahead and make sure your house flipping strategy incorporates a financial plan that accounts for all of the soft costs you may run into while flipping a home.
More stringent regulations came in after the 2008 market crash and many of them were designed in ways that don’t tend to benefit those flipping homes. The Federal Housing Administration (FHA) requires that you own a home for 90 days before you can sell to a buyer who’s using an FHA loan. Additionally, if you sell a home for more than twice your purchase price, the FHA will require two appraisals, and the seller is responsible for the cost of the highest appraisal. This will cost you both time and money.
How to avoid: When flipping a house for the first time, take into consideration how long your project will take and who will be a potential buyer.. If your project will take less than 3 months and you think you’ll be selling to a first time home buyer, you may run into issues with them following through on funding.
Regardless of where you live in the country, there could always be some type of weather to throw your home renovation schedule and your flipping and selling timelines off course. This is one of the main things you need to know when flipping houses that is easily forgotten or brushed aside when weighing all the other things you need to consider. You can’t paint, garden or lay concrete in just any weather. Also, home buying patterns are different throughout the year and can alter demand for a home when it is time to sell. The best times to sell are in spring and summer. They are very favorable due to the warm weather and people don’t need to bundle up in rain or snow to see new homes. Also, this is when many people have the desire to start fresh because there are summer breaks from school, or they are ready for a project or change after a winter inside.
How to avoid: Always have a backup plan in case it rains when you need to paint or it’s 100 degrees when you need to landscape. Check weather reports and forecasts weekly and book vendors that it could affect accordingly. Also take into consideration when you plan to have your renovation completed and whether that will be a time when you can expect maximum return for your property based on market demand.
Theft often occurs during renovation projects, which can radically impact your budget and timelines due to damage or loss of materials and tools. Aside from theft by those who prey on construction projects, even the people you hire to work on the house may steal from you.
How to avoid: Make sure that you change the locks on bank-installed door locks (you don’t know who else has the keys), remove any valuables or tools lying around, and install an alarm system to monitor the property. Also, vet your contractors thoroughly and ask for references from past clients to make sure both them and their crews are credible and trustworthy with your investment.
Sometimes, when we prepare to do a project as big as flipping a house, we are so focused on the nuts and bolts of the task that we forget the obscure scenarios that could negatively impact us. There is an endless amount of information and things you need to know when flipping houses, so do your best to take advantage to ensure your house flip is a success. And don’t forget to think outside of the "happy path" so you are prepared for every situation that could potentially come your way.
Keep these five things in mind that muddle projects and consider your back-up plan or preventions for them. You’ll have an edge when first starting to fix and flip by understanding not only what to do, but what could go wrong as well.