Flip the Property
Many foreclosure properties are flipped by real-estate investors. After acquiring the property, the investor sells it immediately as is or repairs it and then offers it for sale.
Flipping properties is now the subject of several reality television shows. The concept is simple: Buy at a lower price and then sell it for a higher price. On television, the shows emphasize the fix-it-up part of the process. As a real-estate investor, you have two choices when flipping a property: selling as is or selling after the renovation.
Renovating, remodeling, or fixing up a foreclosed property often becomes a passion for the real-estate investors that work at flipping properties. It can make the overall transaction more complicated. It requires additional credit or cash to pay for the repairs and renovations. It takes longer to have your payday, but it can result in a bigger return on your investment.
Some units will require work before the property can sell. For example, if you acquired a foreclosure property without a working furnace, you are likely going to need to repair or replace the current furnace. Unless you are selling to another investor who does not need financing, this type of basic fix-up is required. To sell the property to a noninvestor, it will need a working heating unit. No lender will approve a loan with the property as collateral unless that property has a working furnace.
Flipping Starter Home Properties
It takes some experience to recognize the full potential of a profitable flip deal. Of course, there is only one way to get this valuable experience: by doing it.
Flipping works in all real-estate markets, in bad or good neighborhoods, and on all types of properties. However, if you are just getting started and learning the process, you should concentrate on flipping starter homes. Starter homes always remain in demand. First-time homebuyers and other investors are particularly interested in decent and affordable houses.
Don't allow yourself to get bogged down to the point of inaction. Many beginning real-estate investors are afraid of making mistakes and overanalyze a property. By doing so, they never make an offer to purchase the property. They develop analysis paralysis and do nothing.
There are several reasons why starter homes make sense for the beginning real-estate investor:
Starter homes just cost less.
The demand for starter homes may slow down, but it never really stops. New families always need (and accordingly search for) a place to live.
Most people understand the real-estate dynamics of a starter home because they have lived in one at some point in their life.
There are simply more starter homes than expensive homes available.
Starter homes make better rentals. While there is a market for someone to pay $4,000 a month for a high-end, pricey mansion, there are far more people that are willing and able to pay $800 a month for more modest housing.
It is important to know what a starter home is and what it sells for in your chosen investment farm area. In one real-estate market a starter home might be $85,000. In other markets a starter home might be $250,000.
There are no set standards as to what determines the price range of a starter home in any given market. It varies from locale to locale.
Starter homes include the basics of decent housing: two or three bedrooms, a bathroom, a kitchen, and a living room. Other items taken for granted include the mechanical systems (heating, plumbing, electrical), roof, working windows and doors, and the other standards of a decent house, such as a usable kitchen. Many starters could have other features and amenities, such as a fireplace, air conditioning, garage, or an extra bath (or a half bath).
Properties to Avoid as Flips
There are certain properties that you should avoid. They just don't make good properties to flip. Consider these suggestions:
Don't submit purchase offers on unconventional properties.
Avoid buying commercial property or other special-use properties that require a specific user, such as a restaurant.
Don't buy the oddball property in the neighborhood. If all the houses on the block are three-bedroom, two-bath, split-level homes with garages, don't buy a one-bedroom, one-bath cottage with no garage.
Don't purchase properties that are missing essential components. For example, don't buy a property without a working sewerage system.
Avoid purchasing properties that do not have the basics. As an example, there has to be a safe water source. Air conditioning is not important for properties in Maine, but in Arizona and Florida it's a necessity.
Pass on the properties that don't fit well in the neighborhood. If all the properties in a subdivision are colonial two-and-a-half-story homes, don't buy the sprawling contemporary style home that looks out of place.
Quality Versus Shoddy Repairs
If you are going to fix, remodel, and repair properties before you resell them, consider the importance of making quality improvements. Creating problems for future homeowners might mean a bigger profit for you, but is that ethical or fair?
It is easy to make economic decisions without thinking about how they might hurt a future property owner. By all means make a fair profit, but you should consider your ethics in your real-estate transactions. Treat others as you want to be treated.
Consider the need to replace a stove in your property you are going to flip. You could purchase a very basic model for $350 or a more expensive one at $600. Most likely you would opt for the lesser-priced model, even though it has less features. Now consider a leaky roof. Rather than fix it you cover up the leak evidence with some paint. Avoiding the more expensive repair might make economic sense, but the hapless new homeowner probably can't afford to replace a roof. And while they can see the stove they are buying, they can't see the leaks that were intentionally covered up.