Andrew Church, Managing Director of bridging finance company Rodel, shares his insight on house flipping.
With Spring upon us, temperatures are rising, flowers are flourishing and you’ve most likely scheduled in (or at least planned to schedule) a much-needed spring clean or home makeover. I’m sure you’ve all heard about property flipping. A trend which comes in and out of season. One finds a well-priced home for sale, puts some capital in along with some sweat equity into sprucing it up, and then resells the house for a profit. House flippers can make brilliant profits, but is it really that simple?
What Is house flipping?
House flipping is when real estate investors purchase homes, often at auctions, and then resell them at a profit a few months later. Can you make money doing this? Yes. Can you make a great deal of money doing this? Yes. However, as always in business, higher rewards mean taking greater risks.
What do I need to flip a house?
Due to today’s strict mortgage lending credit criteria and a selective property buyer market, you need some capital and a wealth of confidence! Imagine buying a house for R1 million, investing another R500k in renovations, and then being unable to sell it. You are now stuck with your mortgage on the investment home, plus all related expenses like insurance, security and home maintenance expenses. We all want to avoid that scenario!
Get educated
Robert Fragoso, house flipping expert, recommends: “network with as many people as possible who are already doing it as this will give you much of the experience that you will be lacking. Read the purchase contract and understand it fully as well as hone your skills on valuation.” Be careful of relying purely on an estate agent’s valuations, as you need to be aware that they have their own agenda. Only use reputable and tested estate agents.
Get in contact with potential buyers before you even start looking for an investment house to flip. Take advantage of any opportunities where you can mingle and build relationships - this will ensure you have a pool of buyers when your upgrades are complete.
Make it your mission to know the needs of your local real estate market right now – not their needs further down the line. Ideally, you want your house to sell quickly, so you’ll want to choose a home in a high demand location.
Next is home financing options. How will you purchase the house? More importantly, can you afford to take this risk? A mortgage originator who offers a free service to buyers will tell you what your options are and your probabilities of obtaining bank finance.
It’s also vital to know how you can maximise the home’s profit potential. Devote your time to these tasks first as they can have a fantastic outcome. You’d be surprised at the difference a fresh lick of paint, installing additional closet space and sprucing up a garden makes.
Research Listings and Repossessed homes
Many websites, such as Private Property, provide repossessed home listings. Be sure to conduct thorough research from the wealth of information available to you on the internet.
Make an Offer
Bargain buys are extremely rare in the property market. Seldom are homes offered for less than fair market value. What one needs to look for are opportunities. In other words, what is the least you can spend on renovations which will result in the highest price increase upon resale? Be sure you know the highest amount you’re able to pay prior to making an offer and stick to your price. Remember to also include your estimate for interest, legal costs, government duties and renovations.
Let the work begin
First things first. Ensure that you apply for approved building plans as soon as, or even before the sale is final. Then if you’re not doing the renovations personally, make sure you have a well trusted team of professional contractors.
When starting renovations, it’s a prerequisite to have a set budget with associated deadlines. Remember that your risk should lie with variations in the future sale price and period taken to sell, NOT the variations in the renovation costs.
Relist and sell
The choice is yours on whether you choose to sell your house with or without the use of an estate agent. In an unpredictable market, it’s often best to use an estate agent who knows the current market fluctuations and has the network to get you the most optimal price quickly.
In closing, flipping homes is risky, but can be very rewarding. You’ll be faced with tough decisions, such as whether or not to accept an offer that is lower than you had in mind. You need to be prepared for the possibility of the home not selling straight away. If you can tolerate all the pros and cons and you have the time and passion for fixing up and selling homes, then go for it.
