Real estate “flipping” is essentially the act of buying a property at a discount, swiftly refurbishing it, and then selling it at a higher price to turn a profit. Flipping property can be a very lucrative endeavor, but also a risky one if the investor (or amateur) has difficulty reselling the property.
The art of house flipping has been around for years, but only recently became widely known after several popular television shows (such as Flip This House or Flip That House) documented the profitable real estate practice. There are even classes that teach people how to flip real estate!
The real estate housing bubble also leant to its popularity, with amateurs everywhere trying their hand at the art of flipping as home prices and loose lending practices allowed nearly anyone to give it a reasonable shot.
So how does real estate flipping work anyways?
Typically, an investor will seek out real estate bargains by searching for foreclosed properties, real estate in duress, tax lien properties, and other unique situations where homes sell for less than market value.
Often times the properties just need minor fixes and cosmetic work to make them marketable again, although some may be in perfect shape, just the result of a distressed sale.
Once an investor finds a suitable property, they will purchase the property, often with zero money down and a short-term loan, usually by way of a low-rate adjustable-rate mortgage.
The investor will then either renovate the property with some quick fixes, or simply resell it to another investor or buyer. Multi-investor flips are fairly common, as one investor may opt to make a quick sale and subsequent profit without putting in all the legwork to restore the property. The next buyer will then renovate the home and search for a homeowner to occupy the property. Though more time consuming and costly, the profit involved will be greater.
Good flipping opportunities sell at a discount.
Because these homes sell at a discount, a house flipper will likely turn a profit with or without renovations. That said, not all house flippers renovate the properties they buy. Some may hold onto a property and quickly sell it as demand warrants, even without touching the home.
Other times, an investor may secure an option to buy a property, and once a seller is in place, they’ll buy it and quickly resell it. There’s also “condo flipping”, where investors reserve the right to purchase a condo in the future, and once development nears completion, they resell those rights to another buyer.
The most common type of house flipping seen on TV is the quick renovation type, sometimes referred to as “fix and flip”. These types of flips involve a quick turnaround with necessary repairs and aesthetic improvements to make a home more marketable. This usually involves new paint, flooring, fancy appliances, marble tabletops, landscaping, and other eye-catching moves to boost the perceived value of the home.
Amazingly, just a few basic improvements can boost the marketability and sales prices of a home in no time at all, though nowadays homebuyers may be a bit more wary of such “improvements”.
In 2006, the Department of Housing and Urban Development bumped up the amount of time required for owning a property to more than 90 days between purchase and sale date to qualify for an FHA-insured loan in an effort to deter property flipping.
Many mortgage lenders will also carefully look at title documents to ensure a property hasn’t been sold and resold again and again. Make sure you look at the chain of title before buying a property to ensure it’s not a scam. Also be sure to do your due diligence and conduct a detailed home inspection before making any commitments, as you won’t want to end up with a “lemon”.
And keep in mind that now that the housing boom has begun to slow, unsold housing inventories have risen, home financing has become a lot more difficult to obtain, and home prices are on the downturn. The result will likely throw a wrench in the real estate flipping game for the short-term, though savvy investors will probably take advantage of short sales and the increase in foreclosures to turn a profit.
Read more: Should I buy a flip house?