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:
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 flipping.
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.
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.