As the housing market strengthens ever so slowly, house flipping is once again gaining popularity. If you’re considering a house flip, you’ll first want to decide which type of flip is right for you.
Some people enjoy the thrill of a risky, but potentially high-yielding, investment that requires very little hands-on, while others enjoy the process of improving a house with their own hands.
Whatever your reasons or motivations for considering this type of venture, it’s important to be informed so you don’t end up with a house you can’t sell, or worse yet, can’t pay for.
Choose the Right Type of Flip
There are three basic ways to flip houses, each of which comes with its own set of advantages and potential downfalls. The three common types of house flips are fixer-uppers, bank foreclosures, and new constructions.
Fixer-uppers typically require the most time, labor, and financial investment. If you have the skills to renovate homes yourself, this type might be ideal for you. Otherwise, you’ll have to hire contractors to complete work — an added expense and an easy way to get ripped off if you don’t know much about home renovations.
You also need to focus on actually improving the quality of the home, versus just its appearance. Less showy renovations, such as repair or updates to wiring, plumbing, heating, cooling and insulation, should take priority over surface-level improvements, such as painting or putting in wood floors.
Bank foreclosures are popular because homes are often in very good condition; the owner simply couldn’t pay the mortgage. However, lender-owned properties (REOs) can be difficult to obtain because of the lengthy legal process involved with the home’s previous owner. Some of these properties can be tied up for as long as eight months before they’re available.
Furthermore, you may need to have liquid funds for these purchases, because banks don’t hand out loans on them as easily (a wise reservation on their part). Coming up with enough cash to pay for a house outright is not a financial step just anyone is able to make. For those who can, these types of properties can be extremely profitable. Nevertheless, foreclosed homes often suffer from neglect from former owners, and in some cases, outright abuse — so you may still need to budget for renovations.
New construction flipping is most popular and successful when there’s a large boom of growth in a particular area. These properties require the least amount of investment because they don’t need renovations. The trick with new construction is finding homes that are near growing cities, industries, and commerce, because these will increase the value of the home and ensure a profit.
It’s not usually advisable to invest in new construction when the housing market is sluggish due to low demand. You may be sitting on it longer than you intended or budgeted for. On the other hand, when interest rates are too high, you may not only be unable to sell the home, but also unable to afford the mortgage payments yourself! That’s why this type of house flipping requires thoroughly researching not only the mood of the real estate market, but the location of the new home. No one wants to end up owning a nice, new house in the middle of a ghost town.
As with many areas of life, our unique personalities, desires, abilities, and ambition will determine how we choose to do things. Being informed about the different methods of house flipping and unique set of circumstances that come with each of them is an important tool for the investor looking to “flip that house.”
Which type of house-flipping appeals to you?
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