SOME HOUSE FLIPPING BASICS
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House flipping defined, according to Wikipedia, is …
‘a term used primarily in the United States, which refers to the practice of buying an asset and quickly reselling (“flipping”) it for profit. Though flipping can apply to any asset, the term is most often applied to real estate and initial public offerings.’
Any way you want to define it, house flipping can be fun, profitable, and (contrary to Wikipedia), beneficial to many neighborhoods around the country.
Simply put, people buy property and turn around and sell at a profit. Others, however, tend to buy and hold onto property as a long-term investment with a payoff for down the road.
This type of long-term property investment is for people who are not out to make some quick money, but rather to let their investment mature over the years at a slow pace, to eventually be a source of constant (passive) income in the form of rent payments and a solid equity foundation.
The people who do buy and sell in quick succession, are the property flippers – precisely was is meant by house flipping defined. They are basically speculators of real estate that buy low, do some improvements (some extensive and some modest, and even ones with no updates at all), and then sell as fast as they can.
These types of investors want a quick turn around in their investment to keep cash turnaround. Some deal with many properties, while others, like myself, tend to invest in only one property at a time. Relatively speaking, it is a safer investment in terms of the amount of money coming in and going out dealing with just one piece of property. With multiple properties, you’re obviously going to have more expenses (and not to mention a few more headaches).
In analyzing the different types of flips, there are a few variations.
House Flipping Defined: Ways to Flip a House
- Selling to Investors
- You have no intention of doing any actual work to the property. You simply control the option to sell to an investor at a cheap price, but one where you still make money, and remove any risk in the process.
- Selling ‘As Is‘. Reselling to a prospective owner or with no updates, or guarantees at all.
- Fixer Upper. This is where you buy a distressed property at a low price, and one that needs significant upgrades. This type of property can require, in some cases, significant cash outlay.
House Flipping Defined: Anybody Can Do It
The great thing about this type of thing, is that anybody can do it. You don’t have to be a builder or a real estate ‘insider’ to be a good flipper.
Sure, these types of professions have a leg up, so to speak, on the average person, but that doesn’t mean they can’t do it, and do it well.
To put it simply as house flipping defined, what you are doing is buying a home that needs some work. From simple aesthetic upgrades (painting, new carpeting, landscaping, to some larger-type renovation (new kitchen, bathroom, roof replacement). After the upgrades are done, you put the home back on the market to sell. Do some local research to see the types of houses that sell, and for and what price. This will give you an indication of where your comfort level might be when just starting out.
There are different ways that this can work. You can buy the property and do all (most) the remodeling yourself, hire people to do all the work for you, or a little of both.
But I also want to stress here the importance of flipping with integrity.
House Flipping Defined: Ethical Flipping
Let’s say you take property that’s in bad shape (or just generally needs work) with the full intention of having the best remodeling work done with no cutting corners, and sell to someone with the knowledge you did the best you could do.
Believe me, if you are above-board in all your dealings as it relates to property flipping in general, the result will be a beautiful job well done, and a house sold to a family that’s just as proud and excited to move in it as you were to fix it up.
Where some people see the opportunity to make as much money as possible while doing the least amount of necessary work as being ‘smart’ in some property flips, I see it as a potential roadblock in the perception of the average person when viewing a house that’s been recently flipped. Those people will think twice about spending a lot of money for something that doesn’t appear to be there.
An example would be where a house was purchased for a really low price, say $50,000, and 2 months later is back on the market for $115,000, at the top end of the neighborhood price (for similar houses known as ‘comps’).
You wonder what in the world was done to the house to make it suddenly worth that much money. The unscrupulous house flippers out there will slap some paint on the walls and lay some new (but really cheap) carpet on the floor, maybe install some new, off-brand vinyl siding and plant a few bushes out in front.
They then stick a ‘For Sale’ sign in the yard with the added notation ‘Fully Renovated’ underneath as an enticement. Someone will end up buying essentially the same house as before, but with new carpet and shiny new vinyl siding – and for a lot more money than it’s worth.
Those types of flippers will say that the market dictated the price, and they got what the market said it was worth. In the end, the buyers bought a house with problems that a few band-aids covered up and new paint, and the flippers got all they were really looking for, and nothing more, which was money in their pocket.
This is certainly not the house flipping scenario I am advocating here.
For your renovation work, by all means save money where you can both in terms of material and labor. Just don’t do it at the expense of putting an inferior product out on the market to make a few bucks. So … When planning the remodeling phase, try not to skimp on the following:
- The amount of money needed to do a solid remodeling job on the house
- The materials used in the remodeling process
- The money to pay for good, experienced labor, workmanship, and other expertise associated with renovation
- You’re willingness to do things in an honest, ethical way
House Flipping Defined: The ‘Gamble’ of a Flip
I know people who love to go to casinos and throw their money down on all sorts of slots, tables, card games, and various other channels that are meant to separate them from their hard-earned money. They lose $50 here, a few hundred there, even manage to win every odd once in awhile. When you ask them how they did on their latest trip, they might tell you they lost a little, but that they definitely ‘had a lot of fun‘.
What’s interesting is that many people I know who regularly visit these casinos insist that they are ‘way ahead’ in the amount of money they’ve won over the course of a year, as oppose to how much they’ve actually lost – and say it with a straight face – I might add. I’m sure you know a few people like that too.
Understand, I’m not here to demonize the gambling industry. It’s just that it seems when I say that I want to flip a house, a few of my gambler friends gently remind me that I’ll end up throwing my money away, or that I’m ‘not going to make nearly what I think I should’ with such speculation as it relates to house flipping.
They say it’s ‘too much hard work’, and that ‘you might lose your shirt too’. I acknowledge that there will be some work to do, and yes, if you don’t know what you’re doing, you could wind up making a lot less money that what you intended.
‘Then why go to all that trouble?’, they ask.
‘Because’, I say, ‘I have a lot of fun‘.
Again, I don’t want to rain on any one person’s parade. If going to a casino to try to win some money turns you on, then go for it! I think that, although flipping is most certainly a gamble (real estate speculating), you can still go into it with a solid plan to help insure that you put as much money in your pocket as possible, and do it in an ethical way.
The reality is that speculation on any real estate is a gamble to some extent. As long as you know that you could lose some, or all of your money on any given deal, then you understand you’re risk is commensurate with the amount of knowledge you bring to the table with regard to what exactly you want to do.