Flipping houses sure looks great on TV, doesn’t it? Looks like anyone with a decent eye could walk into a dilapidated shack, dump thirty grand into it, and come out with double their investment. Looks pretty easy and fast, and as though flipping houses is a great way to make a quick profit. Right?....
Attom Data Solutions defines a flipped house as a property that is bought and sold within a 12-month period of time. In 2017, 138,410 people or companies were involved in flipping 207,000 houses. Both the number of flippers and the number of houses flipped were at their highest levels in a decade.
Today’s flippers are different from flippers 10 years ago who were able to use cheap and easy money to finance their trades - not to mention, that ten years ago, the bottom fell out of the housing market and prices/ interest rates were at an all-time low. Today’s flippers make a lower net return on their flipped houses than those in the business 10 years ago. This is due to higher home prices, fewer distressed houses, sizzling hot competition and very few homes available to flip. The average gross return on investment in 2017 was 49.8% compared to 51.9% in 2016, according to Attom.
Also, today’s financing for flipping houses is different than it was 10 years ago. Private lending for flipping is a growing trade because “there’s money to be made.” Fannie Mae, the government backed lender, now backs as many as 10 investor loans per flipper but requires very strict underwriting. And interest rates on flippers are higher (10% – 12%) than interest rates on regular owner-occupied properties (4.6% 30-year fixed rate.)
Just because the word "foreclosure" is attached to a property, doesn't mean that you're going to get it for a steal. Sites like HUDHomeStore.com and Auction.com both auction off foreclosed homes to the highest bidder. This is BEFORE an inspection, which you, the buyer pay for, along with setting up all utilities. Some forclosed homes, or distressed sale homes have been completely wiped out by the previous owner. I've seen them wiped clean of lightbulbs, copper, water heaters, even the kitchen countertops!
If need be, walk through these homes with a contractor that you trust. Get a general idea from them of what you're getting yourself into. If you have a background in construction, and can do a majority of the work yourself, great! That's probably one of the many reasons why Joanna keeps Chip around - free labor!
A word to the wise from the most successful flippers…
1. Try to use all cash.
2. Set a clear budget and timeline for renovations.
3. Keep renovations simple, and comparable to the neighborhood.
4. Focus renovations on the kitchen and bathrooms
5. Location is key – an up and coming neighborhood is the best.
6. Thoroughly research and know comparable pricing structures of sold homes.
7. Avoid houses that are already listed…go to a seller, a housing wholesaler, a savvy real estate agent to discover available houses.
8. Sell fast for a nice profit; don’t “wait” for a fantasy price.