"Flipping" is the buzzword of the year in real estate -
flipping books, flipping articles in the newspaper, and even
flipping shows on TV! What is flipping, how does it work and
how you can profit? Flipping simply means buying a property
and reselling it quickly, as opposed to holding on to a
property long term as a rental. Flipping comes in several
varieties, most of which are legal and profitable, some of
which are not.
Flip Strategy #1: Buy, Fix and Flip
Let's start with the most common form - the good, old "fix
'n flip". This process involves buying a property that needs
work, fixing it up, then selling on the "retail" market,
that is, to a person who will live in the property. This
method is tried and true, and works very well. You can
easily make $15 - $50k on one deal, depending on your market
and how good you are at finding bargains. The danger in fix
and flips is either paying too much or underestimating
repairs. Be very conservative in your fix-up costs and
length of time it may take to resell. Also, make sure you
include in your analysis the cost of paying a real estate
agent to sell the property.
Flip Strategy #2: Buy, Refinance & Lease/Option
Rather than sell the fixed up property for all cash, sell
for terms. Once you have completed the rehab, refinance the
property at its new appraised value. If you did the math
correctly, you should have little or no money in the deal.
Sell the property on a lease with option to buy. The rent
payment from your tenant/buyer should cover your mortgage
payment (if not, consider an interest-only or adjustable
rate loan that is fixed for 3 years). When your tenant
exercises his option to purchase, you reap a larger profit,
since you don't have to pay a broker's fee. If the tenant
exercises his option after 12 months, you benefit from a
lower capital gains tax rate.
Flip Strategy #3: Buy & Flip "As Is"
Don't like to do fix-up work? Consider selling the property
"as is" as a light fixer upper. If the local real estate
market is hot, you should be able to sell the property in
poor condition just a little below market. This is
especially the case with houses in "transitioning"
neighborhoods. Make sure, of course, that you acquire the
property sufficiently cheap enough that you can sell it
below market quickly and still profit.
Flip Strategy #4: Wholesale
Strategy #1, the fix and flip, is very popular, which means
there are a lot of investors looking for rehabs. You can buy
the property cheap and sell it for just a few thousand
dollars more to another investor without doing any work. You
won't make nearly as much as the rehabber, but you will
realize your profit quickly.
Flip Strategy #5: Pre-Construction
In very hot real estate markets, prices are appreciating as
much as 2% per month. If you time things right, you can put
a contract on a pre-construction house or condominium, then
flip it to someone else when the development is complete. If
it takes 12 months for the development to be complete, and
the condo price is $500,000, you could make $100,000 or more
in one year! Of course, the opposite is also true - you
could end up losing money if the local economy tanks and you
end up with a worthless condo that you can't sell for more
than you paid. Use this approach very carefully.
Flip Strategy #6: Scouting
The Scout is an information gatherer, so not technically a
property flipper. He is the "bird dog" who finds potential
deals and sells the information to other investors. Many
people get started as a Scout for other investors because it
does not take any cash or prior knowledge to look for
distressed properties. The Scout finds a property for sale,
gathers the necessary information, and then provides this
information to investors for a fee. The fee will vary
depending on the price of the property and the profit
potential. The Scout can expect to make five hundred to one
thousand dollars each time he provides information that
leads to a purchase by another investor.
Flip Strategy #7: Illegal Flipping
OK, I am not advocating this approach, because it is
illegal. Illegal property-flipping schemes work as follows:
unscrupulous investors buy cheap, run-down properties in
mostly low-income neighborhoods. They do shoddy renovations
to the properties and sell them to unsophisticated buyers at
inflated prices. In most cases, the investor, appraiser and
mortgage broker conspire by submitting fraudulent loan
documents and a bogus appraisal. The end result is a buyer
that paid too much for a house and cannot afford the loan.
Since many of these loans are federally insured, the
government authorities have investigated this practice and
arrested many of the parties involved. As a result, the
public perceives is flipping to be illegal.
The fact is, "flipping" - as I described in the beginning of
this article - is not illegal. Loan fraud in the process of
flipping is what is illegal, so don't confuse the two. The
other six ways to flip are very legal, very ethical and very
profitable!
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