Buying an asset and reselling it quickly
for profit is termed as flipping, the
term flipping being mainly related to real estate in the United States. Flipping
is often associated with real estate and initial public offerings though the term
can be extrapolated to any type of asset. The flipper who is the buyer renovates
or repairs the house and sells it for a profit.
Flipping homes involves three main steps - buying a house, renovating the house and selling the house for a
profit. Northward home prices and nominal interest rates have promised flippers
an attractive business. Flipping can earn the flipper a profit of $20,000 to
$100,000 depending on the area and the location of the property.
Flipping homes is not risk-free; the volatility prevailing in the real estate scenario has made it even riskier
these days. While entering into the business of flipping homes and investing
money in the same, it is advisable that the person gain substantial knowledge
of the subject. A flipper should be educated in the areas of general real
estate law, tax implications, local building code, home financing, house market
analysis, current buying and selling demographics, general contracting, etc.
But with falling house values and tighter credit by lenders, not many are getting into flipping homes. Not many are as enthusiastic that there might be a revival of home values.
Types of flipping
Real estate flipping: Real estate flipping means making profits from buying a
house for low price and selling it at a higher price in a growing market or
buying a house that needs to be repaired and fixing up the repairs to later
sell it for a higher price.
Multiple investor flipping: Multiple investor flip indicates a
concept where one investor purchases a property at below-market value and sells
it quickly for a higher price to a second investor, who in turn sells it to
another party for a little higher price than he purchased it.
Fix and flip: Fix and flip means buying a house for a significant price
cut when compared to the existing market value. The house might have been sold
for a considerably low rate because:
- The condition of the house might be bad requiring
major renovations/repairs to be resold.
- The owner wants to sell the house in a hurry because
he/she is relocating, divorcing or wants to finish off a pending
Golden rules of flipping homes
Location: Location is the key to flipping homes. Do not opt for
houses that are not likely to find potential buyers easily.
Concentrate only on superficial/cosmetic changes: Remodel the house
before flipping, but stick to superficial/cosmetic changes. Don't go in for a
house that needs a major makeover. Buy homes that need some repainting,
flooring make-ups, painting fixtures, etc might fetch you more money while
Try to fix by yourself: Hiring professionals can eat into your
profits. If you possess sufficient DIY skills, then you sure are a winner here!
Understand flipping: Understand the market before you get into
flipping - in a slow real estate market house flipping can be extremely risky.
Analyze and work out the profits and the appreciation on the property.
Sell smart: Fix the price of the house based on the renovations you
have made and make sure you include the costs of hired labor, if any. Fix an
amount that will fetch you profit.
- Get acquainted with the neighborhood. Study the
neighborhood by collecting details about schools, shopping areas,
community organizations, business opportunities, safety, etc.
- Browse for information on any low-priced house that
is being sold out by banks and financial institutions.
- Identify a house that requires minimal renovation and
make sure that you locate this house in the best area/block. Such houses
attract plenty of money.
- Becoming a member of any real estate club can help
you collect plenty of information related to real estate.
- Never pump in all your money in renovating the old
house that you purchased. Always bear in mind the profit you will be
making out of the deal and renovate accordingly.
- A house in an undesirable area may not fetch the
profits that you are looking for.
- Never quit your permanent job for flipping, hold on
to flipping as a part time job.
Benefits of flipping homes
Renewed demand for houses in a poorly developed area can improve the area and the
neighborhood. Flipping can help this process.
- People into flipping can make quick money. There are
many instances where people locate a house as well as a buyer
- Increased demand for houses will encourage more
people to relocate to these areas thus improving the business and the
overall economic development of such places.
- For the government, remodeled houses sold by flippers
in an area with growing popularity will fetch more revenue through
Limitations of flipping homes
- Flipping is considered the main cause behind the artificial
boom that led to a real estate bubble in the year 2004 and 2005.
- Excessive flipping in a particular area can lead to
real estate price hike in that area thus forcing people to move out of
- Flippers are not professional people to remodel a
house thus increasing the number of poorly remodeled houses in the market.
- If there is an increase in the interest rates, the
number of houses sold will also go down. Flippers will not be able to sell
their house and will also be unable to repay the loan borrowed thus
disturbing the economy and society.
Loans for flipping
Real estate advisors suggest that flippers should not
invest their personal money to flip homes; they should borrow the right type of
loan for the same. Financial institutions that loan money for the purpose look
into the financial history of the flipper and then decide on the loan amount
and tenure. Only 80% of the amount requested is granted as loan. In general,
loans granted for flipping homes are for a short term and attract a high rate
of interest. The drawback of these types of loans is that they attract heavy
interest rates after a two month period. The flipper has to flip the house
within two months else he will be paying high interest rates.