Flipping Houses for Profit

A colleague of mine just discovered homes in her city being auctioned by the municipality after repossession for large amounts of back taxes owed. She checked it out, and got excited when she saw a downtown single-family dwelling assessed at $170,000 that only requires a minimum bid of $27,000 (!) in the auction.

Never mind that the auction is blind - truly blind, not just in terms of bids made by others wanting the same property.... You cannot inspect the property, inside or out, before making your bid, nor will the city tell you if there are any liens, bad history, etc. You can only bid on the house once and, if yours is the highest bid, you have to pay in full, immediately.

That's a whole lost of risk to bear - even for real estate investors experienced in the walk on the wild side known as 'house flipping."

Buying a home and selling it quickly for a substantially higher price is never an easy path to take in real estate investment, namely because:

  • For real profitability, you have to buy the property at a ridiculously low price (like the above tax-auction scenario) which is hard to find; think 20% of its market value for true profitability
  • You have to be prepared to spend time renovating, or money to hire renovators
  • You have to be able to separate emotionally from the purchase, i.e. don't get attached to a house you're supposed to sell quickly
  • Beware of doing more upgrades that the market can bear; otherwise it could turn into a cash-in/cash-out situation vs a real profit maker
  • Ideally, you have the resources to flip more than 1 house, to make it truly profitable. It's a good idea to keep some properties longer to accumulate some equity for the future
  • You have to do your homework on the market you're buying/selling into
  • You may have to go with private financing if your lender doesn't like fast buy/sell situations

Flipping Easier in a Bad Economy?

Obviously, there can be strong house-flipping opportunities in an economic downturn where house prices are deflated, such as extreme cases in the US in the past year, sometimes known as "foreclosure investing."

Of course, TV shows such as Flip That House and Property Ladder, both on TLC, and Flip This House on A&E make it look relatively simple. Certainly sexy and fun. None of which is necessarily so.

So, knowledge of the realities is key. You have to know a good real estate deal when you find one, run the numbers of how much it will take to fix it up before you buy, conservatively estimate the selling price, and include an acceptable profit for all your hard work. And  a real estate broker or sales representative can be a great source to find those diamonds in the rough.

Posted by Don Lawby on November 24, 2009
Aaron Wright

Aaron Wright

Sales Representative
CENTURY 21 United Realty Inc., Brokerage*
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