Is Buying a Flip House a Smart Move?

April 16, 2012 No Comments »
Is Buying a Flip House a Smart Move?

Should I Buy a Flipped House?

If you’re in the market to buy a new home, you’ve probably encountered one or two “flip homes” along the way.

When I say flip homes, I mean homes that were purchased fairly recently, rehabbed, and then put back on the market to turn a quick profit.

The whole house flipping trend hit a fever pitch during the height of the housing boom back in the mid 2000s, then cooled significantly as home prices faltered, then resurfaced once markets stabilized.

I expect this trend to continue from here on out, thanks to the promise of big profits and endless optimism in real estate.

No matter market conditions, there will always be investors, construction companies, and even brave individuals trying their hand at the flipping game, trying to take ordinary properties and make them fabulous.

What Is a Flip House?

Even if you didn’t immediately recognize that you were looking at a flip house, or actually stepping foot inside one, your real estate agent probably did.

Assuming they didn’t notify you, there are some tell-tale signs that you’re in a flip home.

The most obvious will be the fact that the house was recently purchased (by an investor or builder) and is now in what appears to be immaculate condition.

In other words, the kitchen will have sparkly new granite (or quartz) countertops, lush wood cabinets, stainless steel appliances, and new floors.

The rest of the house should look like something out of an Ikea or Williams Sonoma catalog, and the home should be vacant. That’s right. No one should currently reside in the home either.

That said, the home should be properly staged as well, meaning furniture and other fixtures will be brought in to make the house look its absolute best, and to make it appear as if someone presently lives there.

By now, you should be gushing at the mere sight of it, wondering why it’s so much nicer than all the homes around it. What gives?

Is a Flip House a Good Investment?

Well, there’s always a catch. Surely something so perfect can’t be so cheap, right? Correct. Flip houses almost certainly sell for more than comparable homes in the surrounding area.

The easiest way to figure this out is by looking at Zillow Zestimates and comparable sales for homes nearby. A flip house will likely be listed for much more than its comps, and the Zestimates of homes around it.

Put simply, flip houses are typically built beyond their surroundings, meaning they’re nicer than the neighboring homes, and probably more luxurious than ever intended for the neighborhood.

While this isn’t necessarily a bad thing in terms of beauty, it will call into question some serious valuation issues from both prospective buyers and lenders providing financing.

First off, you may wind up paying way too much for a flip house as opposed to a conventional home purchase.

Secondly, you may have issues if the appraisal comes in low, which could put your mortgage in serious jeopardy if the bank just doesn’t like the purchase price.

Finally, one could argue that you just buy the house down the block for 25% or so less and simply make the improvements you want yourself.

Sure, it’s nice to move into a house that doesn’t need a lick of work, but you’re paying for that convenience. And you’re stuck with whatever the house flipper decided on.

And guess what. Flips aren’t always as clean as they appear. Often times, the builders cut corners and/or put in cheap fixtures. There may also be permitting issues. Then there’s what lies beneath…

Imagine a movie set, or a facade. It looks great from the front, but what’s behind it? Are the pipes, the sewer line, the electric, and the bones okay? It’s hard to tell with a bunch of shiny stuff staring you down. So a thorough home inspection is paramount.

You may also find yourself in a situation where you buy too much house, which is one of the more common home buying mistakes out there.

So if you or your agent identify a flip house, you better do some solid research to ensure you aren’t buying a home with very little upside value.

You may be the envy of your friends and neighbors, but you’ll have overpaid for your house. Even worse, you might find that it’s a flip house gone bad, riddled with problems that will require even more money out of your pocket.

What to Offer on a Flipped House

If you just can’t help yourself, and really want that flipped house, you’ll need to take special care when making your offer.

As noted, such properties are often priced disproportionately to those around them because they’re generally nicer. But just because a home has a fancy new bathroom or kitchen doesn’t mean it should sell for a lot more.

Additionally, just because a home got the flip treatment doesn’t mean it should sell for a couple hundred thousand more than what the investors paid six months earlier.

Unlike a conventional home purchase where you’re dealing with Everyday Joes, a flip will likely be sold by a savvy industry seller. This could be a construction company, a real estate agent, or a combination of both.

In short, they probably know real estate better than you, and may even know it better than your agent. So you need to tread cautiously, but you should also realize they have a bottomline. It’s not all profit – they’ll have poured money and time into the property and they expect to get it back and then some.

Things like construction, materials, temporary financing, taxes, commissions, and so on must be factored in. This means it’ll be tricky to play hardball.

But you don’t want to find yourself in a situation where you’re bidding on a flipped home because it’s probably already priced high, and if it fetches a price over asking, you could run into appraisal issues (such as a low appraisal!).

However, if you notice a flip house has been sitting on the market for a while, you can pounce. Why? Well, flippers aren’t in it for the long-haul. They want to buy and sell as quickly as possible so they can move onto the next project.

This is why you’ll often see flips get price reductions pretty rapidly. Remember, temporary financing is expensive and they need to free up capital for new projects. Also, these homes are vacant, so it’s not like anyone is getting a shelter benefit from them.

Long story short, if you must have a flip house, look for ones that have been sitting for a month or two. You might be able to get the upgraded house without the upgraded price.

Lastly, keep in mind that a flip house won’t make a lot of sense if it isn’t to your exact specifications. If you don’t like the new countertops, the paint color, or the general styling, it might be better to buy a house in need of a little TLC and just do it yourself.

And by do it yourself, I mean hire someone and pay less overall.

Pros of a Flipped House

  • All the work is done for you
  • The home is truly move-in ready
  • Don’t have to delay your move
  • Don’t have to think about how to make the home better
  • Don’t have to deal with contractors or live in a construction site
  • You could get a deal if the home has been sitting…

Cons of a Flipped House

  • Often priced higher than surrounding homes
  • May be hiding imperfections or deeper issues
  • Some flippers use cheap materials and cut corners
  • You may not even want/like all the upgrades
  • May have trouble appraising and getting financing
  • Could find yourself in a bidding war
  • Could overpay for the house

Read more: Best and worst home improvements.

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