Things to consider before 'flipping' houses
With the rates that property values have grown in the last 10 to 15 years, many amateur investors have gotten in on the flipping game.
Growing trends in the housing industry include buying fixer-uppers, foreclosures or investing in new construction with the intent to flip it ‘quick and dirty’ for profit. It has proven to be a lucrative process for many...but ‘buyer beware’ rings true for flipping houses as it does with any home purchase.
The influx of television shows on the topic of flipping depict how an investor will buy a rundown or foreclosed home and provide it with some much needed TLC. They will renovate and remodel, upgrading kitchens, bathrooms, floors and landscaping usually in a short period of time. Then they will turn around and sell the house for a considerable profit. However, this is a risky business – and it’s real life - so there is huge window for failure.
Sometimes the cost of renovations, mortgage and time ends up costing more than your eventual profit margin. Often foreclosures and the banking process can be more trouble than it’s worth. Most ‘flippers’ buy homes several years old and often have unanticipated problems lying under the surface such as foundation cracks, termites, mold or even asbestos. Have a back-up budget just in case renovations do not go as smoothly as planned.
Mortgage companies owning a property want to get rid of it as quickly as possible. In this case, homes are often sold or auctioned at a price considerably lower than its market value. Frequently, the house is sold only for what is owed on it! But often through auctions and foreclosures the house is sold ‘site unseen’. Which means you could be buying a home with a serious number of problems, leaving you without profit.
Though flipping houses is fun and can be very profitable, flipping a home too quickly may result in a tax audit. If the money made off a house flip does not immediately roll into a similar investment, i.e. another house flip, your profit may be subject to a capital gains tax. Yikes!
Flipping houses has the potential for unlimited income. Success depends on one’s financial situation, skill in evaluating real estate for purchase, knowledge of home renovating, negotiation skills, and a little luck. Know your market, pick the ‘right time’ to buy and sell and flip it quick!