House Flipping Requires a Lot of Homework

Over the past few years, cable television has been loaded with programs about buying, fixing up and reselling residential properties. Most call it flipping, although that term, in the old days, referred to reselling without any significant work.

Programs like The Big Flip, Flip This House, The Real Deal, and Flipping Out have been both entertaining and thought-provoking. If you travel in real estate circles, they have been a good item for conversation with friends and clients.

Potential flippers are inspired about the concept of investing in real estate, and the potential of rehabbing properties to make a potential profit. Newbies get a unique view on what it’s like to make a living investing in properties and flipping houses. Don’t forget, too, that current homeowners learn tricks about how to dress up properties they presently own and are thinking about selling.

However, these shows tend to glamorize a difficult business by showing experienced professionals in action. To this day, I have never heard of a “flipper” who made a significant gain on their first venture. The shows tend to make it seem easy. It takes time to learn the ropes and make a significant profit.

They seldom talk about the financing side of the transaction and how important arranging appropriate and affordable financing can be. The truth is, if you don’t put 20 per cent down, or find affordable secondary financing, your whole business plan may be shot in the foot. With less than 20 per cent down and traditional financing, the mortgage requires high ratio insurance, which can add up to 4.25 per cent of the mortgage. Needless to say, that cuts into your profit significantly.

Here are some key factors that can make or break your business plan: Real estate market conditions are key. If property values are stagnant or in decline, this can adversely affect your investment. Are there an unusually high number of properties on the market when you will be selling?

You need to know property values and buy at a good price. Always remember the two make-or-break numbers are the amount you invest and the amount you get out.

Be a DIY (Do it yourself) expert. Required work to be done needs to be done well, and as economically as possible. Hiring expensive contractors to do the work cuts into the bottom line. An experienced flipper will tell you that it’s hard to make money if all you do is go through repainting and replacing flooring. It works, but minimal changes also may mean minimal returns. The ideal situation is a major problem that affects the purchase price when you’re going in, and you can fix/remove the problem without huge cash outlays.

Location. Location. Location. This adage always applies. Having the cheapest house in the best neighbourhood is always better than having the best house in the bad neighbourhood.

Learn the ropes before you start using your own money. Do research to find important facts. Will granite counter tops bring a better net return than laminate countertops? Will a coat of paint around the basement bring a better return than ripping it all out and making it brand new? Would hiring a professional stager pay dividends when it’s time to put the house back on the market? There are many questions you need to know the answers to before you start.

Even though the television shows are a form of reality television, you need to step back and realize it is not as easy as sitting on the couch watching television. There can be many rewards, but not without hard work and research.