There's no fewer than a half dozen shows on television right now about flipping houses. Seminars pop up all over the country hosted and put on by these reality stars about how to do this, sometimes with 'other peoples money'. Well, it's not that simple. Television is notorious for showing only the glamorous sides, but not the realities. Take Flip or Flop for example. How many of these have they ever shown where the flippers lost money? Maybe one or two in all the seasons? That's not reality. A cash buying flip company admitted to our office in a meeting earlier this year they lose money on approximately 24% of their flips. So there's a few things you need to know about investing in real estate if it's something you are looking into.
Finding Flips is Different Than Finding Rental Properties
Any house can be used as rental property, because rental properties are used as long term investments instead of short term gains. So finding rentals is easy. The MLS has every property listed, and running rental comps takes just a couple minutes. Flip homes, however, are a different story. As the saying goes, you make your money on the buy. So flip homes are very, very rarely listed by Realtors on the MLS because we list them typically at the price they should bring on the market. This leave little to no room for an investor to come in, fix it up, and make a profit. So where are these found? Some investors send letters to homeowners, some door knock, some have access to wholesalers who unload properties at deep discounts. Realtors sometimes run across them on listing appointments and tell their investor clients about them, but anyone searching the MLS looking for a great deal is unlikely to find one.
Expect to Put 20% Down if You're Financing
Lenders, in just about all cases, want 20% down when you're buying a home you're not occupying. There are the occasional lenders who just need 15% down, but there's still mortgage insurance involved unless you have 20% equity. So expect to spend some money, whether you're buying to flip or rent. This isn't including any costs to repair or rehab the home, so you'll need working capital as well.
You Need to Have a List Price in Mind Before Ever Buying the Home
One of my biggest pet peeves on these flipping shows is when they come to decide on a list price. It may change a little bit from when the home is bought, rehabbed for a couple months, and ready to list. But when they sit there and list the home for 10% higher than comps in the neighborhood because it's a flip, you're losing money on holding costs when it doesn't sell because you're overpriced. You should ALWAYS know your target list price before you ever buy the home to know if it's a good buy with the rehab costs.
FHA 90 Day Flip Rule
One of the things no one ever talks about on any shows is FHA's mandatory 90 day flip rule. FHA will not allow financing until the 91st day after a home was previously bought. In layman terms, if a flipper buys a home, he cannot accept a contract from an FHA buyer until 91 days after he bought the home. Conventional financing does not have this rule. So if you're in a heavy FHA price range, be aware.
Make no mistake, there's a lot of people who make a lot of money both flipping and/or buying and holding real estate. While no investment is guaranteed, it's one of the safest investments one can make. But you need to be aware of things before starting, or paying a lot of money to sit in a seminar and listen to people talk about how to get started.
So if you're in the market to buy a home, Contact Me Today! I can help you get set up with mortgage and insurance people to make sure you're able to buy a home and have the best coverage.
You can also get a copy of my Home Buyers Handbook when buying to learn about the process!