Home flipping is back! I am constantly getting calls from seasoned and novice investors looking for properties to flip. Inman has an article that quoted RealtyTrac stats which reported that in 2015, home flipping increased in 75% of the markets nationwide. Chicago is no exception with a 21% increase in home flipping. In fact, as the article states, “The total number of investors who completed at least on flip in 2015 was at the highest level since 2007…”!
In theory it sounds like a quick, simple investment, but the truth is that flips are far from easy. While there may be high profits, it also comes with high risks. I hope the following tips help!
Know the Neighborhood. One of the first things a flipper should do is become an expert on the neighborhood they are looking to flip in. Whether that means talking with locals, driving up and down the blocks, or getting cozy with local real estate agents, it is very important to know what kind of properties the neighborhood demands and the price trends. For example, if most of the homes in the area have an attached garage, and yours doesn’t, that will put you at an immediate disadvantage. Similarly, if it there is too much inventory for sale in a particular neighborhood and is a buyers market, it is probably best to look elsewhere.
Contingency Fund. Having liquid cash is key when it comes to flipping. Many of the properties that will be purchased will be without a professional inspection. It may have been vacant for a long time with much deferred maintenance. It is quite likely that while doing repairs or demolition, more issues that were hidden from sight become visible. Once these issues become known, they must be disclosed to all potential buyers. Make sure you have extra cash available as an emergency fund.
Assess Financials Conservatively. If according to your numbers it will cost $150,000 to rehab the property, round up to $175,000. If comparable flipped properties are being sold for $400,000, round down to $375,000. By running the numbers conservatively, an investor is minimizing the risk, Note that one should be conservative to a limit, and not unreasonably as that will most likely prevent you from ever making a purchase.
Meet With an Experienced Flipper. It is always good practice to speak with someone that has done it before. That way, you will be better prepared for what to expect, possible issues to anticipate, and how to overcome them.
Set a Timeline. Time is money, especially for flipping properties. The longer the project takes, and the longer the property stays on the market, the investor is losing money. It is common when doing remodeling for the construction to drag on. A prudent investor will be on top of the contractors doing the work to make sure all deadlines are met.
Connections. Real estate agents, attorneys, inspectors, contractors…all of these people play important roles in the process. Take out a Realtor for lunch and perhaps you could get a discount on the commission by telling him you will use him for future investments. Most times when purchasing a property that is a foreclosure or at an auction, you won’t have the opportunity to conduct an inspection, by having an inspector connection, perhaps he will come along with you on an initial showing and point out potential issues. All of these connections can help you out when you need it most.
Price it Right. As mentioned above, time is money and the longer it takes, the less of a profit the investor is making. If you price the property to high, odds are it will just sit on the market until there is a price change. The longer it takes for the property to sell, the more taxes, utilities, maintenance, and potential issues you are opening yourself up to. Best practice is to consult with you real estate professional and price it aggressively with a little room to negotiate.