You Can House-Flip

"Houseflipping" is a buzzword that’s become increasingly popular as more TV programs show everyday people trying to make a fast buck by buying, fixing up and quickly selling residential property.

With know-how, networking, planning and great timing, turning homes for profit can pay off. But mistakes and missteps can result in costly errors that could cut into profits.

Derek Pierce, the general manger of a Florence, Ala.-based real estate investment company, has been flipping properties full time for about four years.

Pierce said there are two types of house-flipping. One type involves flipping a residential property to an investor without fixing it up. The other type, which may be more familiar, involves rehabilitating a house so it can be sold to a prospective homeowner.

“Your main goal is to find deals and quickly turn them,” Pierce said.

The key to finding deals is to learn the market or area where the buyer would like to purchase properties.

“Buy a $3 map and get to know every area possible. Know subdivisions. Know what property values bring,” he said.

Plus, the more research a person does, the better prepared he or she will be.

To learn more about buying and selling real estate for investment, network with experienced investors.

Pierce said the best way to find investors in the area is to get in the loop of a local real estate investment club. Ask them what types of residential properties they are looking for.

“You’ve already got a market of buyers and sellers there,” he said.

Pierce suggested looking for motivated sellers when looking for good deals.

He said that with divorce and foreclosure rates at an all-time high, there are motivated sellers in every area. He added that there are even more motivated sellers in a soft real estate market.

Deals can also be found with a problem property or situation, but beginner house-flippers may want steer clear of those.

Pierce said he looks to sell a house as quickly as possible from the day he buys it. The longer the property goes unsold, the more it costs to own it. The house only makes money for the flipper if it sells.

He said he held a property for 30 seconds before turning around and selling it to an investor in a simultaneous-close transaction. That type of transaction -- having a buyer in mind before you even close on your purchase -- is another way for properties to be sold quickly.

The other type of house-flip that people may be more familiar with, and is typically portrayed on shows such as TLC’s “Flip That House,” is one in which a person buys a home to fix it up and resells it to someone who wants to live there.

Kathleen Austin Kuhn, president and CEO of Housemaster Home Inspections in Bound Brook, N.J., said people want to look for a property that may only require cosmetic changes but not substantial structural changes. This especially holds true for newbies.

“It’s not going to be cost-effective to excavate a foundation,” she said.

Kuhn stressed that buyers should also look for houses where the major elements are in good shape and aren’t going to require a significant amount of investment.

One way to do that is by getting a qualified home inspector to walk through the property so house-flippers know exactly what they are getting into and whether there are major underlying problems with the home.

When looking for properties to renovate, look for something that fits well within its neighborhood, that isn’t overly customized or over the top.

“Find a house that has the most potential in a good neighborhood,” Pierce said.

He added that buyers don’t want to find a home that’s functionally obsolete, such as a four-bedroom, one-bathroom home or a one-bedroom, one-bathroom dwelling.

The home’s price is dictated by the market. Pierce stressed that buyers should avoid overpaying for the property and underestimating the cost of renovations, and buyers can do that by knowing the market.

He said house-flippers can network with real estate agents to get comparable prices of nearby homes that have sold to get a good idea what properties are going for.

After going through the home with a fine-tooth comb, it’s time to make an offer. In house-flipping transactions, Pierce said people can usually expect a 15 to 20 percent consistent profit.

“If I can’t do at least 15 percent, I don’t want to look at it,” he said.

Pierce said that buyers should subtract the costs of replacing the roof and carpet from the listing price. He suggested making an offer for 70 percent of the asking price. That way there’s a 30 percent built-in margin after cost.

But there are other pitfalls to avoid in the sale.

"You must always be sure to have a clear title to the property, your property and rehab estimates have got to be precise, and it’s important to know why someone wants to sell,” Pierce said in a statement. “Also, don’t be afraid to pass on a deal because there will always be other deals in the market. It’s not the deals that you pass on that will break you; it’s the dumb deals you should have never been involved with."

To maximize the return on the investment in the flip process, planning is crucial. Buyers might want to create a schedule and timetable for completing everything that needs to be done.

Pierce said he typically allows for a three- to four-week window for renovation and then another three to four weeks of marketing the property for sale.

Some inexpensive cosmetic changes that will go a long way in a flip include painting, cleaning carpets, replacing outlet and light switch covers, changing the front door hardware, and installing new toilet seats.

Pierce also said that focusing on landscaping is an inexpensive way to change the look of the house.

For those who plan to update a kitchen or bathroom as part of house-flip, picking the right contractor is key to sticking to the budget and timetable for the project.

Pierce said when hiring a contractor, find out what their specialty is, get estimates from three different companies and have them do a small job first.

He said that the house-flipper always needs to manage the home’s renovation projects and they need a good business relationship with their contractors.

When all the fixing up is complete and it’s time to prepare the home for sale, he said the home’s smell is important. Some odors that could deter a potential buyer include smoke, dust, and mildew. A fresh coat of paint or new flooring can sometimes diminish the scent. If you can't tackle the source of the scent without extensive work, try baking treats just before the home is viewed, light a few candles, or use an odor-neutralizing product to freshen the air. Open windows also do a world of good to a closed home.

Prospective buyers’ first impressions are their last.

“You can’t wing it. Get it ready. If you show it too prematurely, you’ll lose out on buyers,” Pierce said. “I’ve lost more sales by showing a property too soon.”