These days a large number of real estate investors, both new and experienced, are looking for good homes to flip (re-sell quickly at an increase in price). But not every home, even if it’s a foreclosure, is going to be profitable as a flipper.
Buying the right kind of home on a flip can mean the difference between making a lucrative profit versus barely breaking even or enacting only a small gain. Why toil for weeks on a property unless we can realize a substantial profit? The objective should be to maximize our profit potential from the start, while reducing overall risk. To that end, I have created the following 10 commandments to help you achieve that goal:
1. Thou shall choose a home with a good location. Location is still the most important aspect of real estate investing. Homes that are close to major thoroughfares, good schools, nice restaurants, shopping venues, and other desirables will sell the quickest and for the best price. Other good locations include homes on or near the ocean or other large bodies of water, and homes near popular parts of town or nightlife.
2. Thou shall choose a home in a decent neighborhood. No matter how inexpensive the home may be, very few buyers want a home in a high-crime area. Check the local crime statistics to avoid buying in a bad location.
3. Thou shall choose a home that is not super unique. While there are many beautiful homes that are unique in design or features, many potential buyers are easily scared off by homes that are too different from other surrounding homes, or so unique that they offer challenges to normal living routines. Cookie cutter homes may appear to be boring, but they sell more quickly and for more money.
4. Thou shall choose a home that is surrounded by other nice homes with no eyesores. Few buyers want to live next door to a house with garbage in the yard, cars parked on the lawn, or a humongous boat in the driveway. You can turn a home into a palace, but if any of the homes surrounding it look awful, it’s going to be a tough sell and garner a lower price. So when you are viewing homes, look carefully at the surrounding homes as well.
5. Thou shall choose a home built in 1978 or after. Homes built prior to 1978 may contain lead based paint, and as such will require that you adhere to the Renovation, Repair, and Painting (RRP) laws of the Environmental Protection Agency when rehabbing. The law makes working on these homes much more time-consuming and expensive. You have to document every single renovation in case of an audit.
Failure to follow the laws may subject you to fines up to $30,000 or more per offense! However, by flipping homes built in 1978 or later, you do not have to adhere to these guidelines because lead-based paint was no longer produced.
But even without lead-based paint issues, newer homes are just easier to sell because they have more of the features that today’s buyer wants. The closets are larger, and so are the bathrooms and master bedrooms.
6. Thou shall choose a home with a good floor plan. A good floor plan is one which flows easily from room to room. Many people prefer the newer and more open floor plans, in which the kitchen is open to the family room, formal rooms are smaller, and the master and other bedrooms are often on opposite sides of the home. Other features I look for are homes which have a foyer, a master bedroom in the rear of the home, large closets, inside laundry area, and the garage near the kitchen for easy carrying of groceries into the home.
7. Thou shall choose a home where the purchase price plus ALL expenses will give you a comfortable margin of profit on the re-sell. In order to make a profit, you must know the total cost of sales price, rehabbing, carrying costs (taxes, insurance, utilities, maintenance), and closing costs for both buying and selling BEFORE making an offer. Your realtor can help with the estimates.
8. Thou shall buy a home that targets the largest number of potential buyers by Affordability. If you buy an expensive home with the idea of re-selling for a huge profit, that may work, but it could also take a lot longer to re-sell. If only a few people can afford to buy your home, be prepared to have it on the market for several months, while other less expensive homes sell in weeks or even days in a strong market.
Conversely, if you buy a dirt-cheap home with the belief that anyone can afford to buy it on the flip, you may be fooling yourself. The likely buyers may have poor credit or too much debt to qualify for a mortgage. Your best buyer could be an investor looking for a turnkey rental home, and then you will have to settle for a much lower price than what you expected.
9. Thou shall choose a home with a good lot. Many people prefer a rectangular lot with equilateral sides. Pie-shaped or other irregularly sized lots may be a more difficult sell, and should be avoided. It is also important to make sure that the gradation of the land is such that water will flow away from the home when it rains, so there are no potential problems with flooding.
10. Thou shall choose a home that can be rehabbed within a relatively short period of time. When it comes to flipping a home, TIME IS MONEY. Every day the home remains unsold reduces your potential profit on the flip. Carrying costs include homeowner taxes, insurance, utilities, maintenance, and interest if you’re funding the flip with any kind of loan. So the golden rule is to get in and out of the home as quickly as you can. For that reason, I prefer to flip homes that are less than 2,000 square feet.
By following these 10 commandments, you will be more likely to minimize your risks and make a big profit on your next home flip. Good luck!
About the Author:
Ethan Roberts is a real estate writer, editor and investor. He’s a frequent contributor to InvestorPlace, and his work has been featured on MSN Money and Reuters. He’s also written for Seeking Alpha, Investopedia, The Fiscal Times, ForSaleByOwner and Smarty Cents, and was one of five contributing editors to The Tycoon Report. He’s been investing in real estate since 1995 and has been a Realtor since 1998. He also teaches classes on investing in residential real estate.
