Flipping Properties
The basic concept behind flipping a property is to buy the property and resale it right away at a higher price. There are different types of flipping strategies.
- Foreclosure Properties
- Preconstruction Properties
- Rehab Properties
- Undervalued Properties
Foreclosure properties that are owned by banks or distressed sellers are popular among investors since these properties are sold below the fair market value. There are lots of risk in buying foreclosed properties. Most of the time, the properties are sold as is and the interior is not available to be inspected. You could very much end up with a huge mess inside needing a lot of work.
Flipping Preconstruction Properties
This type of flipping had been very popular the past few years from 2002 till 2005. When the real estate market kept going up and up, pretty much any market such as California and Arizona, anyone could have made a killing by flipping preconstruction properties.
The way preconstruction flipping works is that you identify a market that you feel will be appreciating at a high enough rate. Then you sign a purchase contract for a home that is not yet built and put down your earnest money; typically between $500 to $3,000, to reserve the home. After that, you wait for the home to be built, can be as little as 4 months to well over a year. You are hoping by the time the home is finished building, the value of the home has increased from when you originally signed the purchase contract. Then you simply place the home on the market for sale and rake in the profits. This worked great in 2002 and 2003 in Arizona and California. People were making 20-50k+ after taxes on new homes.
This sounds easier said then done. First, with the real estate market slowing and almost coming down to a halt, flipping preconstruction properties for a profit is almost impossible. You may get real estate agents hungry for commission who will tell you the market is still doing good but you can no longer just buy a home in an area by just throwing a dart on a map and waiting untill the home is finished. Flipping preconstruction homes requires property market timing or else you may end up owing more than a home is worth. An example of this happening is in Star Valley, Arizona, investors built up almost the entire subdivision by putting a deposit down. The smart investors ended up cancelling their purchase contract while the not so lucky investors who ended up closing on the home now owe more than their home is worth.
Flipping Rehab Properties
Rehabbing homes can generate a good amount of profit if done properly. This type of flipping involves an investor finding a property that needs a lot of work done to the home at a price that is below market value. The general rule of thumb is to buy these homes at or below 60-70% of fair market value after factoring in the rehab cost. Rehabbers do this to give themselves enough margin in case they underestimate the cost of rehabbing the properties.
Typically, the more beat up and run down the home is, the better chances of making more profit since the home will be cheaper to acquire. A lot of new rehabbers underestimate the rehab cost and end up over their heads before the home is even completely rehabbed. Another mistake is the rehabbers overestimate the value of a property. An apprasial may lead you to think the home is worth a lot more but if the home won't see for the apprasial amount, it does you no good. After a home is finish being rehabbed, there is also holding costs until there is a buyer for the home.
Flipping Undervalued Properties
Flipping undervalued properties is where you acquire the property below the fair market value, turning around and selling the home. There are various ways to purchase undervalue properties. Sometimes homes that are listed by owners underestimate the value of their home. Also, some people may just be looking for a quick sale and don't mind lowering the price a little to get the quick sale. Again, the key here is to research the actual fair market value to make sure you are indeed buying a home that is undervalued not just because the seller told you or an agent is telling you.
For more info on flipping properties, check out Bill Bronchick's course, "Step-by-Step Guide to Flipping Properties".