House Flipping

Flipping Houses

In general, the term "flipping houses" merely means buying a property and then reselling it in a short period of time – say from a few weeks to a couple of months. More specifically, the practice of "house flipping" refers to the practice of buying and selling properties either as an investment strategy or to make a quick profit.
While the practice has been around for a long time, the term is only now working its way into the public lexicon। This is partly because the practice has traditionally had a somewhat "shady" reputation and the purchase and quick reselling of houses has been a method for perpetrating mortgage fraud. Nevertheless, there are perfectly legal methods for flipping houses and there are many people who currently do it for a living.

Types of "Flips"

One of the most time-honored ways properties are flipped is by renovators. The hoards of home improvement programs, such as "This Old House" which has been on television since the 1970s, serve as testament to the real estate fad of today. While some of the "This Old House" homes were owned by people who invited the show in so they could renovate, others were purchased, renovated, then resold for a profit.
Other ways to flip houses include buying properties at estate sales and at mortgage foreclosure auctions। In these cases, buyers are hoping to obtain the property at a greatly reduced price, then make a profit for reselling it at fair market value. In these cases, the buyers are not interested in renovating the house, but simply to turn a quick buck.

Dangers

In some cases, house flippers are using the practice as a form of investment. With the stock market in a period of flux, real estate is a tangible commodity that will not vanish with a bad quarterly earnings report. Still, as with any investment, the price paid up front has to be less than the selling price for the effort to be profitable. This are no more guarantees in real estate than there are on Wall Street.
There also are other considerations that can affect the profitability of house flipping. Some unscrupulous dealers use flipping to artificially inflate the value of a property and skim money from a mortgage company. Because of this the Federal Housing Administration (FHA) and some private mortgage companies have tightened rules for issuing mortgages of "quick turnaround" sales of properties and this can complicate the paperwork for flips.

Risks and Benefits

Risks and Benefits

Some might call house flipping a fad. Others will say it is a foolish "get rich quick" scheme. Still others will tell you it is a viable money-making business with great potential. In any event, it is a real business with opportunities to make a lot of money – or, conversely, lose a lot.
As with the risks or benefits of any business, the more invested, the more the potential profit or loss. One aspect of house flipping that is certain is that the one sure way to make money is to sell a system or book that teaches others how to do it.

Risks

The most obvious risk to flipping houses is that an investor will lose all the money put into buying a property. This is somewhat unlikely since real estate is a fixed commodity and, unless the house burns down and the lot gets repossessed, there will be something of value that is owned regardless of the investment. Therefore, the first caveat of house flipping is to make sure the property being bought actually exists – do not buy any swamp land in Florida, or the Brooklyn Bridge.
Another risk is that the bottom will fall out of the real estate market and there will be no one willing to buy the property once it has been purchased for resale. With the state of the real estate market today, that also is somewhat unlikely. An associated risk is that someone will pay too much for the house and not be able to make a profit on the resale.

Benefits

The major benefit of any type of business is the profit to be had. If even half the claims of those selling house flipping systems can be believed (and that might be a risky percentage), then this business has great potential. These financial benefits come in two categories – one, the profit that comes from a quick purchase and resale of an undervalued property and, two, the profit that can be realized by renovating a house and selling it for the increased price it will command.
There also are some intangible benefits. House flippers can be their own boss. While any business will require more time and effort than some would like to put into it, working for oneself can be very satisfying. If the flipper also is a renovator, there is the added benefit of taking a house and making it into a show place.

Resources

Resources

Learning the business of flipping houses can be time consuming and costly. Still, it can be more costly to go into it without the proper training and knowledge. Most people who buy and sell houses for a living are real estate professionals, many of whom possess real estate licenses. One of the inducements to making money flipping houses is that such training is not necessary.
Nevertheless, anyone wanting to buy a house and sell it quickly for a profit needs some knowledge of the real estate business. Short of becoming a real estate broker, they should at least invest in a book or two, if not a full-blown course.

Books

Even in the age of the internet, for many people wanting to learn a new skill, the first place they will look is the library. If they want to combine the library and the internet, they go to an online book seller such as Amazon.com. If they want to learn how to flip houses, Amazon might be the better choice. There are several books on the subject to be had, ranging from general overviews of the business to those specifically aimed at renovating and flipping houses.
One volume that is mentioned as a good resource by many is a book called " buy it fix it flip it"buy It For less than $10, it is a guide that covers the basics of how to buy a house and put it into good condition for flipping. Several others that can be had cover the basics of the business and concentrate on the buying and selling aspects of the real estate business. Thankfully, many of the late-night "infomercials" promising riches in buying and selling real estate have faded into the past, but they still exist on the internet. While the cassette tapes offered on television during the heyday of the "get rich quick" schemes during the 1980s have been replaced by compact discs (CDs), they are not in short supply. Prospective house flippers can expect to pay between $100 and $300 for these courses.
There are more resources than just the packaged house flipping courses to be found on the internet. There also is real estate software. One such package offers much the same benefits of a money management program, including specialized calculators to help gauge the profitability of a proposed purchase. The software also promises to track costs and help the flipper analyze what needs to be done to get a property ready for resale.

Renovation

Renovation

One of the people who can be said to be responsible for the popularity of flipping houses is Bob Vila. As host of "This Old House" and later "Home Again," Vila taught thousands of people the art and craft of home improvement and restoration. These are the same skills that many "weekend warriors" have turned into a business and lifestyle through house flipping.
Not only did Vila's "home improvement" show give rise to a popular sitcom of the same name, it also has been multiplied many times over on various cable television networks. Some of these programs specifically center on projects where a house is bought, renovated, then resold – the classic model for house flipping.

Sweat Equity

Although there are many examples of house flipping that do not include extensive renovations, the practice of buying a house specifically to fix up and resell has grown tremendously in popularity since "This Old House" first appeared on public television. In fact, there are people who make their living by buying, fixing, and selling houses. It is through their use of "sweat equity" that they are able to increase the value of the house and realize a greater profit by selling it than they would normally.
This means there is not a tangible measure of the profit to be made from flipping renovated houses. One couple who spent several years flipping houses after renovating them estimated that they made about $5 an hour for all the time and work they put into the efforts. Of course, that does not include the satisfaction they got out of being their own boss, being able to spend time together, or the included cost of their living expenses in the resale price.

Skills

The ability to make a profit using sweat equity to improve a house's value for flipping depends on the home improvement skills possessed by the buyers. The popularity of "do-it-yourself" programs and the shift from hardware stores to "home improvement centers" makes it much easier to get the tools and expertise to do the work, but it does not help with the needed skills.
Carpentry is one thing, but plumbing is another. When the needed repairs outstrip a house flipper's ability to do the work, outside help is needed. Hiring an electrical contractor to replace faulty wiring can be expensive and can often cut into the profit to be had through the flip. Therefore, it is important for the renovating flippers to be comfortable with being able to do the work themselves and to choose the right house on which to work.

Investment

Investment

People usually make investments in order to see a return on their initial money. The best known type of investment is the stock market. The most secure, and the one with the least return, is a bank savings account. Generally, the amount of potential return is directly proportional to the risk involved. This also can be said to be true for those involved in house flipping.
As with any other use of money, people who flip houses are expecting to make a profit. Since house flipping involves a quick turnaround of buying and selling, it is hoped that the profit also will be a quick one. The amount of risk, however, is an open question.

Alternative Stock

The practice of buying real estate for a quick resale first started hitting the airwaves during the 1980s during a prolonged economic recession. The advent of the late-night "infomercial" was due in part to a number of so-called "self-made millionaires" who bought half-hour chunks of time during which they pitched their "get rich quick" schemes for buying and selling houses. It is a sales ploy that remains popular to this day.
At the time, stock market returns were not what many would have liked. The 1980s also saw the rise of baseball and other sports trading cards as investments, not to mention comic books. Purchasing these "collectibles" was termed the "new stock market." House flipping also was one of these new investment strategies.

Profit

While many were lured into the house flipping market with the promise of big returns, it has remained popular due to a tight real estate market and unusually high demand. In the decades since the 80s, stocks first rose then dropped off again, but house flipping has remained a popular practice. It has become common knowledge that real estate is a fixed asset that retains value even when the worth of other investments fluctuate.
By the beginning of the 21st century, interest rates for home loans had hit record lows and generally remained low. While this cut into the profit to be made on house flipping it kept a steady flow of customers available. It also meant that there was money readily available for those who wanted to buy a property, renovate it so its value would increase, and then resell it.

Trends

Trends

Flipping houses and properties is a practice that is not new, by any means. It probably has been going on since houses have been bought or sold. That does not mean that the house flipping industry (if it can be called that) has always been stable or constant. Trends in the practice fluctuate just as does the real estate market on which it depends.
There are various ways for flipping houses. It can be done as either a "get rich quick" scheme or else as an investment strategy for people unhappy with stock market returns. It also can be employed as a sort of hobby for those who enjoy doing renovation work or want to be their own boss.

Watching the Markets

Trends in the house flipping business generally depend on watching two markets – stocks and real estate. A time-honored maxim of the stock market is that in times of recession or economic downturns, investors should look to diversifying with gold or other commodities with a fixed value. Stock prices might plunge overnight, but the value of certain commodities should remain reasonably stable. In any event, a stock might not rebound, but the price of real estate certainly will, provided it is kept long enough.
For house flippers, that means that their investment will increase in value when interest rates are lower and borrowers can more readily get loans. If the stock market is down (and interest rates area high) a potential house flipper generally will be able to find properties at a lower cost, provided they can find buyers.

Risk

Regardless of the times, many financial advisers will classify house flipping as a high risk endeavor. Making a profit on flipping a house depends on the ability to sell it or else manage the cost of maintaining the property. One newspaper in California estimated that the percentage of houses bought and sold through house flipping in the years 2000-2005 ranged from a low of 1.8 percent to a high of about 5 percent, depending on the economy at the moment.
The trend toward more house flipping was a reaction to the tight real estate market with low interest rates and a high demand among house buyers. The more people there are looking to buy houses, the more profit can be made by those flipping houses as a means of investment.

Bankruptcy

Bankruptcy

One of the prime sources for finding a house to flip is bankruptcy records. Houses sold in bankruptcy auctions rarely fetch their fair market value and, therefore, are good investments for reselling. Another associated source of houses for flipping is an estate sale. In those cases, the heirs to an estate might not be able to manage the cost of maintaining a deceased relatives home, or they might just want to get as much for the property as quickly as possible.
In both these cases, the houses purchased have real potential for providing profit to the house flipper. This is especially true if the house flipper is interested in renovating the house before reselling it. Often houses that drop through to foreclosure auctions are ones where the previous owner was unable or unwilling to spend much to maintain the value of the property.

Motivated Sellers

People who market and sell packaged house flipping systems often refer to "motivated sellers," or people who have to sell their house or lose it to foreclosure. These "get rich quick" schemes often also teach the aspiring house flipper to haunt the county courthouse digging through the public record of foreclosure sales to find properties.
These are cases where the house flipping system can resemble a pyramid scheme. If too many graduates of the program all hunt through the same auction records, it will be impossible to find properties that are sufficiently undervalued for them to realize a profit. Another negative aspect of this practice that gives house flipping a bad reputation is that it seems to appeal to someone's greed in taking advantage of another's misfortune.

Birddogs

Perhaps because of this, many so-called "birddogs" in the house flipping business do not wait for the house to reach the foreclosure auction stage. Public records list the name and address of the person whose house is in foreclosure and the “birddog” uses that information to contact them. They seek out the homeowner soon after the house has been listed in foreclosure and try to work out a deal, beforehand.
If the birddog does not want to buy the house personally, another way for them to make money is by receiving a fee for referring the homeowner to a person who has the resources to clear up the mortgage arrears. This avoids the foreclosure proceeding and any fees attached with it. The person who buys the house can flip it or rent it back to the homeowner, either way realizing a profit on the investment.

Get Rich

Real Estate “Systems”

They come on television late at night, often screaming out their claims, as if the louder they talk, the more likely the viewer will be to believe them. They offer the promise of quick profit, low-risk, and financial freedom. They are the purveyors of the packaged real estate “success” systems. Follow their method, they say, and riches await.
While these advertisers are some of the first proponents of house flipping, they also account for much of the negative impression many have of the practice. Typically, when someone offers something that seems too good to be true, it usually is. Get-rich-quick real estate marketers also ask up to $200 or $300 for their “proven” systems, proving there is, in fact, a way to make money flipping houses – by selling their real estate “systems.”

No Money Down

One of the promises made by most of these get-rich-quick real estate systems is that houses can be bought with no money risked by the buyer. The purveyors of these systems have various ways of managing this, but for all the information they provide in their "infomercials," it is the one key concept they fail to discuss in detail. By conveniently avoiding the details, the sellers of the systems can attract customers who have little money to put toward a business that, generally, requires a lot of up-front investment capital.
Generally, they are promoting methods by which the buyer must secure a mortgage or home loan that is then used to purchase any property. It also is one of the areas where the legitimate and unscrupulous house flippers diverge. While it is possible to flip houses without using your own money, doing so is not nearly as simple a “system” as the infomercials would have one believe.

Motivated Sellers

Another of the basic selling points used by those who market house flipping classes and formulas is to take advantage of what they refer to as "motivated sellers." These are people whose houses are in foreclosure or who are in financial distress. While they usually stress "you are doing the seller a favor," generally this means taking advantage of someone else's misfortune, another reason the house flipping business has gotten a bad reputation.
Leveraging greed, by these methods, can also backfire. One way to obtain properties is to buy them at a foreclosure auction. Sellers of package systems tell their "students" to go to such auctions and look for undervalued properties. There is at least one real-life example of where most of those attending one such auction all were "graduates" of a house flipping system who kept outbidding each other until the price for the house in question was so high no one could have made a profit by reselling it.

Legislation

Real Estate Settlement Procedures Act, RESPA

Buying or selling a house can be a very complicated process. The term "real estate closing" can send chills up the spine of just about anyone who has gone through the process. For a person in the house flipping business, this is a critical step in the process, and the costs and fees associated with the sale can make the difference between profit and thinking of oneself as a "sucker."
Luckily, there are some legal protections for the buyer of a house seeking mortgage financing. These come in the form of the Real Estate Settlement Procedures Act (RESPA) that requires certain disclosures and notifications before a home loan can be issued. These disclosures are designed to detail costs and expenses that go hand-in-hand with the settlement.

Legislation

The RESPA legislation was first passed in 1974 and was designed to help house buyers to be better shoppers. In particular, it sought to limit hidden costs passed onto the buyer and eliminate kickbacks and the sharing of fees between parties involved in selling the house. Any house flipper should be aware of these regulations and have a good understanding of the RESPA requirements.
In general, RESPA covers home loans for properties of from a one- to four-family dwelling. It covers mortgages, loan assumptions, and refinancing in addition to other home loans. It also requires that the person seeking a mortgage receive certain disclosure forms at various periods during the process.

Disclosures

Among the requirement of the legislation, RESPA mandates that a borrower be given a Good Faith Estimate (GFE) of the costs they will incur during the settlement and what they will have to pay in order to close and receive their loan. For a house flipper, such fees can cut into the profit. RESPA also requires the lender to disclose whether or not the loan will be transferred to another lender after the closing.
The act also prohibits certain fees and kickbacks between the sellers and their agents that can further increase the cost of the loan. It also requires that the seller disclose if they have referred the buyer to lender with whom the seller has an interest. Other provisions of the law involve annual disclosures that will be of less importance to the house flipper who does not intend to own the property long term.

Legality

Legality

For many, house flipping is a way to make a lot of money, quickly. As with any "get rich quick" scheme, there are many people in the business looking to take advantage of someone. Even perfectly legal house flipping can run afoul of the law unintentionally, especially since government and law enforcement agencies are now keeping a closer eye on the practice.
For those wanting to get involved in the house flipping business, they should be aware that there are shady characters in the business. This has led the Federal Housing Administration (FHA) to tighten regulations on quick reselling of houses. There are also many regulations governing real estate and many of the functions of buying or selling a house require a state license.

Mortgage Fraud

Probably the most closely watched legal issue with regard to house flipping is mortgage fraud. Under these schemes, a house is bought and appraised at a greatly inflated price. It is then sold to an unsuspecting buyer for much more than it is worth. As a result, the buyer is more likely to default on the mortgage, and the issuer of the mortgage loses money.
As a result of this the FHA in 2003 placed restrictions on houses that are resold within 180 days and completely stopped issuing mortgages on property sold more than once in a 90-day period. Since many houses that are flipped are in lower income areas, FHA is one of the primary lenders able to have an effect on legitimate house flippers.

Shady Deals

There also are many people out there who are more than eager to take advantage of someone who wants to buy or sell a house with the intention of flipping it. For the seller, this is particularly cruel since most likely they are selling because of a financial problem. Their problems become compounded by someone who takes advantage of them by offering to help, then skimming off what little money the seller has left.
In such cases, the unscrupulous "agent" will read through public records to see who has filed bankruptcy or whose house is in foreclosure. They will approach the person with the offer of help, either from an expert who will negotiate with the mortgage company, or a "buyer" who is willing to purchase the property. They will get the seller to sign a contract at which point it just so happens that the expert is either unable to help as expected, or else the buyer backs out, and the shady agent keeps his commission. The person looking to sell is left in even deeper financial woes.

Value

Inspection

Although house flippers might not care about the condition of a property they intend to sell quickly for the potential profit, a thorough inspection of the house can be one of the most important parts of the buying process. This is especially true if the house flipping buyers plan to renovate the property before selling. In any event, buying a house no one wants to buy will make turning a profit difficult.
If for no other reason, a good inspection of the property to be purchased will eliminate any surprises later. Even houses bought at an extreme discount can be money pits if there are major problems with the foundation or other big dollar basics. While there are professional inspectors and appraisers that can be hired, even non-real estate professionals can benefit from an inspection of the property.

Renovators

For those looking for a property to renovate and flip, a thorough house inspection is critical. For instance, not noticing that the floor in one room seems to slope a bit can mean overlooking a crack in the foundation and an added $5,000 expense for repairs. Other than major problems, the inspection also will serve as a checklist for the buyers to know what work they are going to have do and tell them if they have the skills to accomplish it.
Potential renovators also should take the time to go to open house showings of other nearby houses that are on the market. By looking at a house that is in good shape, they can get an impression of what they will have to do to get the house to be flipped into shape to sell. This also will give a good indication of what price they can expect to get for a similar house in a similar location.

Basics

Any good inspection will include both the interior and the exterior. Standing water in the yard or basement is an indication of trouble either with the septic system or the foundation. As mentioned earlier, a sloping floor also can be an indication of foundation problems, as can some cracks in the mortar of brick houses.
Aside from the foundation, it also is wise to inspect those hard-to-get-to places such as the attic or crawl space. Problems with the roof can be expensive and time consuming to correct. Another important aspect to check is the heating and air conditioning system. Again, replacing an aging furnace can be costly – and a faulty heating system can be dangerous for those living there.

History

History of Real Estate Investing

Although the term "flipping houses" is relatively new, the practice of buying and reselling houses, either as an investment or as a quick money-making scheme, has been around for a long time. In fact, using real estate as an investment tool stretches back to the birth of the nation and before. Even in pre-colonial England, property ownership was a symbol of wealth and, before property taxes were established, one of the main ways for the wealthy to ensure their assets.
In more recent times, investing in real estate has been seen as a way to profit during periods of low interest rates. Much of this investment once was in the hands of wealthy wheeler-dealers like Donald Trump who could put together large amounts of money for investing in large commercial projects. More and more these days, smaller scale investments have expanded to include more than the big-money moguls.

Investment

One of the moves that was a precursor to the house flipping phenomenon was the enactment of the Federal Real Estate Investment Trust (REIT) legislation in 1960. This act made it easier for large investors to pool resources for major, mostly commercial, real estate projects. The legislation has been modified over the years and has led to a much larger real estate industry; and any industry that expands is always looking for new markets. As a result, today there is a much greater pool of talent out there for those looking to pursue real estate investments.
Another factor that has led to the house flipping movement was the economic recession of the 1980s. This had the double effect of holding down stock market earnings and increasing the number of house foreclosures. Just about everyone has seen commercials and late-night "infomercials" about how to buy houses "with no money down" and get rich quick. Sellers of these package plans promised big profits with little risk by buying and selling houses.

Renovation Craze

Another factor driving the popularity of house flipping is the rise in popularity of renovating old houses. Television programs such as "This Old House" from the 1980s have given rise to seemingly dozens of such shows on cable television today. This, coupled with the transformation of hardware stores into "home improvement centers," has put the information and expertise into the hands of everyone, not just contractors and carpenters.
These days, there are people who make their living by buying a "fixer upper," living there for a few months while they renovate the property, then selling it for a nice profit and using the money to buy another house.