Defining Real Estate (House) Flipping – According to the BusinessDictionary, “Quick-profit strategy in which an investor purchases real estate at a discount price and improves the property in order to sell it at a higher price. This can be a very lucrative profit strategy if the housing market is doing well.”
Caution Flags – It may be time to find safe ground when an investment market starts producing infomercials, reality shows, “How To” get rich books, “Free” hotel seminars, etc. Inevitably, these are the signs that more losers than winners are ahead!
Overview of the Flipping Market – As the house flipping market has become crowded with buyers – many of whom have no real estate experience – seeking quick returns on lower price properties that need renovations, the inventory of qualified properties has diminished and the risks have increased
Adding to the dangers facing the current Flipping Market is the intense “Get Rich Quick” media promotions and the less restrictive willingness of lending institutions to assist potential Flippers in leveraging their investment. These factors tend to flood the market with unqualified investors who dilute the market!
Complicating the market further, the required skilled construction trades are experiencing an extended period of high demand. The trades are able to demand and receive increased wages and are building backlogs. While this situation is great for the trades, it adds additional renovation costs to the flip and potentially delays house renovation completions. For the Flipper vetting and monitoring the trades for quality, time and costs has become a primary concern.
The Upside to Flipping – Let’s start by saying that some people have been wildly successful flipping homes. The media hype focuses on the successes! Note – Unfortunately, there have been many untold losers – especially among those with little experience in the real estate and renovation markets. Flipping is not a marketplace for the meek and inexperienced, people without a financial cushion, or those betting their hard earned savings!
The Downside to Flipping — Losing Money Instead of Making a Profit! According to The Balance – a literary home to experts who know what they’re talking about –“there are many factors which can contribute to losses when flipping”. The following is a summary from The Balance:
- Unanticipated Expenses – These include everything from building permits, contractor delays, material delays, permit delays, and renovations and materials you had not budgeted for…
- Higher Taxes – Once you have completed renovations on the property, the city may increase your property taxes…
- Losing Your Profit to Taxes – Any profit that you make on an investment property may be subject to capital gains taxes…
- Holding Costs – You will have to pay the loan or mortgage (assuming you have a mortgage on the property), taxes, insurance and maintenance on the property for as long as you own it…
- Difficulty Selling – You are losing money every day you are unable to find a buyer for your property. Because you must pay the holding costs on the property, the longer it takes to find a buyer, the more money you are losing…
- Stress – Stress is also a main drawback of a real estate flip…
Alternative Strategy – We at Properties, Probe and Renovation (PPR) offer the following alternative to help you gain a substantial ROI while Best Utilizing Your Time and Money!
Focus on renovating/converting high-end, luxury homes or condos that need upgrades and TLC! This market can provide the investor with tremendous financial upside as long as they partner with the best Professionals.
Partner with Professionals – Here’s where PPR suggests you start Partnering:
1) Buyer-Side Broker/Agents or Site Location Specialists – You’ll need help sorting through a vast number of locations and properties to find the one that meets your specifications. Vetting the Properties is Essential – Location – Location – Location!
2) Banking/ Financing Partner – Whether your planning on an all cash venture or on leveraging the project for a high potential ROI, it’s just good business and planning to have additional financing available in case of set backs and surprises.
3) Home/Property Forensic Inspection Professionals – It is essential to have each and every house/property thoroughly inspected prior to making an offer or buying. Expect the Expose the Unexpected! What you don’t know will hurt you!
4) Architects and Engineers – The design and functionality of the renovations must target a “Special Breed” of potential buyers who have deep pockets and specific needs. While older homes may have the desired square footage, the configuration and amenities may need substantial improvements. The professionals will assist you in targeting your market and creating a budget!
5) Trusted Renovation Project Manager (PM) – The PM will be your eyes and ears from the inception of the renovation to the completion! Your Project WatchDog! A primary focus of the PM is to work closely with the Architects and Engineers and you to take the project’s renovations from paper to bricks and mortar on time and in budget while at the same time vetting, scheduling and monitoring the required contractors and trades. The PM must carefully balance and monitor: Quality, Time, Costs and Your Interests!
6) Seller-Side Broker/Agent – It is essential to create relationships with Broker/Agents who are in tune with the potential pool of High-End Buyers for homes in your property’s area. They should have previously created corporate relationships for relocation and meeting the needs of the quiet house hunting executives and their families. Listing the house and having open houses is not enough!
The High-End Market – Many savvy real estate investors have been engaged in the high-end/luxury real estate investing market for decades! In many ways this investment strategy has been the a best kept secret. The vast majority of real estate investors flipping smaller, lower cost homes are generally unaware of this market. They do not understand how to gain access to the market, are not familiar with the tastes of the higher income buyers and are uncomfortable dealing with the sellers and buyers of the higher priced properties.
Where to Look for Properties? – If you Google luxury or high-end house flipping, generally you’ll be directed to boom markets and resort areas with properties starting at a million dollars or more – NYC, Boston, Palm Beach, Palm Springs, Las Vegas, San Francisco, LA, etc.
Instead, take a look at desirable suburban – or even urban – areas outside of the high profile, main stream! Some of the best finds can be in the price range of $300,000 – $500,000 and in your own back yard. Many of these areas have a strong industrial/business base and established older residential communities with homes that require substantial upgrades due to passing of generations, people retiring, etc.
Unlike the standard lower-end Flips, these high-end, larger homes – and their potential buyers demand amenities like: 1st Floor Master Suites; Custom Bathrooms; Designer Kitchens; Patio Kitchens; Expanded Custom Closets, In law Suites; etc. and they are willing to pay for them!
The High-End Advantage – Here’s an overview provided by CNBC, “High-end flipping, however, is heating up. Flips with a sale price of $750,000 or more rose 21 percent from a year ago, while homes priced below $400,000 declined as a share of all flips from a year ago, according to RealtyTrac. Homes priced between $750,000 and $1 million had a 41 percent return, which explains why flippers are heading to higher-priced neighborhoods.”
In Closing – What’s Next? – When investing in the Flipping Marketplace, High-End or Lower Cost Properties, consider the following:
- Do your homework 1st before jumping in and committing dollars!
- Determine if you and your family have the time available for the commitment required.
- Think through – and write down – exactly the type(s) of properties that will be your focus.
- Determine your comfort with risk, how much do you intend to invest, and what funds will be available in case of set backs and delays.
- Prepare an accounting system for dealing with expenses.
- Prepare any legal documents that may be needed.
- Determine the parties with whom you will need to Partner (as listed above) – Brokers/Agents, Architects, Engineers, Project Manager, General Contractor, Trades, Bankers, etc. to take the project from inception to completion.
- Develop contingent plans for the unexpected – The unexpected will happen!
How Can PPR Help? – Whether your thinking about entering the House Flipping Marketplace – or already established – Properties, Probe &Renovation(PPR) and its 6 Critical Services: 1) Sight Location 2) Forensic Home Inspections 3) Onsight RenovationProject Management 4) Decluttering & Organization and 5) HomeWatch Visitation. These services offer time and cost saving opportunities worth your Projects and Profits.
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Find out more about Properties, Probe & Renovation (PPR) and How We Can Be Your WatchDog!