- Noah Brocious
Fix And Flip: What It Is And How You Can Make The Most Of One
House flipping has become mainstream with the help of HGTV’s plethora of reality shows about people fixing and flipping properties, but what exactly is a “fix and flip,” which types are the most common and how can you make the most of one?
A house “flip” is when an investor buys a home with the intent to resell it a short time later at a higher price. For many real estate lenders across the country, including my own hard-money lending company, that “short time” refers to any property bought and sold within a 12-month period. If your project requires more than 12 months to complete, though, don’t despair; many lenders can still offer financing for projects or situations that might require a longer loan term.
The Three Categories Of Flips
There are three main types of flips: wholesaling, “wholetailing” and the best known, fixing and flipping.
1. Wholesaling a property can be accomplished one of three ways. You can assign the purchase contract (to the next seller). You can sell via a double escrow (one escrow for the investor’s purchase and one for the sale to the second investor or end user. These are open concurrently but will close in the order of sale.). Or, you can purchase and quickly resell without remodeling the property.
2. Wholetailing a property is accomplished by purchasing a property, doing a quick cleanup of the property, then putting it back on a multiple listing service (MLS) to sell to an investor or an end user.
3. Fixing and flipping is when an investor purchases a property, remodels the property to add value and then (typically) lists it on an MLS to sell to an end user.
Maximizing These Opportunities
So how can you make the most of these opportunities? And what happens to your money if the property takes too long to sell?
To maximize your success at wholetailing, which is becoming more popular — especially in markets with low levels of inventory on their MLS — you’ll want to “buy right.” Buying right means purchasing at a price that will allow you to re-sell at or below market value and still make a profit.
Success with the fix-and-flip method is also dependent upon buying right, as well as setting a realistic budget for the remodel and sticking to that budget. A third key point to keep in mind when planning a successful real estate investment strategy is pricing the property correctly so that it sells in a timely manner.
If a fix-and-flip property takes too long to sell, it can cost investors in one of three ways:
1. Interest carry: This is the monthly cost of money borrowed for the project. This assumes the investor has a loan on the property.
2. Opportunity cost: This is the cost of not being able to take your money and invest it in another project. For example, if a property is priced too high and sits on the market and doesn’t sell, the investor might miss out on a great opportunity to purchase another investment property.
3. Cost of capital: This is the “cost” an investor should charge themselves for the money invested in the project. This amount should be based on what type of return the real estate investor would be able to get if they had their money invested elsewhere. (This can also be considered opportunity cost.)
Since 2008, the market has continued to improve. Although margins have compressed, there’s still the potential for healthy profits to be made with all three types of flipping. When ATTOM Data Solutions released its 2018 Year-End Home Flipping report this month, it noted that in zip codes with at least 10 homes flipped last year and more than 5,000 residents, the highest home-flipping rate was in a Memphis zip code where flips accounted for 29.5% of total home sales. Other areas with high home-flipping rates last year included zip codes in Miami, Florida and Washington, D.C., among others.
The percentage of flipped homes purchased with financing was just over 36% in 2017, which was the highest percentage since 2008. Hard money loans can be a helpful option for real estate investors who don’t have all the capital needed for a project but still want to participate in fix and flips, as well as for more well-capitalized investors looking to leverage their equity to do multiple projects at once.
If you are a real estate investor looking to take advantage of the opportunities that exist with flipping, there are a few things to keep in mind. It is important to make sure you “buy right” no matter what strategy you take. As with all real estate investing, you make your money when you buy. It’s also important to know your numbers on a deal, both when it comes to values that are determined by comparable properties and sales, as well as what costs are going to be associated with buying, holding and selling the property. Opportunities are plentiful today, and I believe they will exist for the foreseeable future. I think this is especially true as people continue to want to live in more established urban areas, because most of these don’t have available land for new housing. So if someone wants a “new” home in one of these areas, they most likely will have to buy an investor fix and flip. So even though all those “reality” shows aren’t complete reality, there are still opportunities for those looking to flip properties.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.