Browsing Category

first time flippers

5 Crucial Questions to Ask Before You Flip Your First House

October 30, 2019

AleksandarNakic/iStock

Thanks to the seemingly endless glut of home improvement TV shows like “Flip or Flop,” “Masters of Flip,” and “Rehab Addict,” it seems like flipping houses has become America’s favorite pastime.

But for the inexperienced, house flipping can be a dangerous and costly game. Make one wrong move, and that “great investment” can turn into a monumental mistake.

Don’t want your first flip to be a flop? Here are five questions you might never think to ask yourself, but totally should, before you begin flipping houses.

1. Do I have a great house flipping team?

Buying and flipping a house isn’t a one-person job; it’s a team sport, and you need to surround yourself with the right players. This starts with having a savvy real estate agent who can help you not only find a great investment opportunity but also negotiate a great deal on the property. Buy low, and things are already looking up!

You also need home improvement professionals who can guide you through the remodeling process and help you set a budget, determine what renovations to make (some yield a better return on investment than others), and solve any issues that crop up during construction.

Typically, you want to hire a general contractor, a person who’s responsible for providing all of the laborers, building materials, and equipment necessary for the entire project.

2. How long will it take to flip this house?

Ideally, you want to buy a house that can be renovated within four to six weeks, says Bobby Curtis, a real estate broker at Living Room Realty in Portland, OR.

A short turnaround time will help you keep costs like interest and taxes to a minimum.

On average, homes take about 180 days to flip, according to ATTOM Data Solutions, curator of a nationwide property database. But flipping a house can take a lot longer. After all, there’s no telling what you’ll find when you start tearing down walls.

Mold could be lurking behind drywall in a basement, or there could be electrical issues beneath the surface, warns J.B. Sassano, president of Mr. Handyman, a national home improvement company based in Ann Arbor, MI.

Also, depending on the housing market, it may take you a while to find a buyer once the home is fixed up.

The moral of the story: Patience is more than just a virtue for house flippers—it’s a requirement.

3. Am I putting too much at risk?

Although there are a number of loan options for house flipping, many first-time house flippers stretch themselves too thin when it comes to how much of their money they invest in a project. Some even put their entire retirement savings or child’s college fund on the line. Not a great idea!

It’s important to truly assess your risk tolerance. Depending on where you are financially, you may or may not be a good candidate for flipping houses right now.

4. Can I think like an investor instead of a homeowner?

When flipping houses, you have to keep future home buyers in mind. While it may be tempting, the last thing you want to do is make home improvements and design decisions that reflect your personal tastes instead of what most home buyers want.

Be prepared to choose home features and housing materials that are classic and offer wide appeal. If you can’t commit to doing that, flipping houses isn’t the right endeavor for you.

5. Do I understand my loan options?

Unless you have a ton of cash readily available, you’ll need to borrow money to buy and renovate a distressed property. But obtaining a loan for a house flip isn’t like getting a conventional loan for a home you intend to actually live in.

Most house flippers use a “fix-and-flip loan” that’s specifically designed for purchasing and remodeling homes. There are five types of fix-and-flip loans, and each comes with its own set of qualification requirements and pros and cons.

Hard-money loan: Sometimes called “rehab loans,” these are short-term loans intended for real estate investments. These loans are usually much shorter than traditional mortgages. Six months to one year is most common, but hard-money loans can go up to five years. Moreover, interest rates are considerably higher, typically ranging from 12% to 21%, and most hard-money lenders also charge 3 to 6 points upfront, where 1 point equals 1% of the loan.

There’s also a limit on how much you can borrow. Typically, hard-money loan lenders allow you to borrow about 60% to 75% of the property value you intend to purchase. So, if you’re looking at a $200,000 property, for example, the most you’ll probably be allowed to borrow would be $150,000, meaning you’d have to pay $50,000 upfront.

Cash-out refinance: If the value of your primary residence has increased, one financing option for your flip is a cash-out refinance. This lets you tap the equity in your home by refinancing your mortgage for more than you currently owe and taking the difference in cash. Your new loan will be the amount you still owe on your mortgage, plus the cash you wanted to take out.

So, say you had a $300,000 loan, on which you still owed $200,000. That would mean you had $100,000 in equity in your house. You could cash out $25,000 of that equity, and get a new mortgage for $225,000, to replace your existing $200,000 loan—and then put that $25,000 toward your house flip.

The drawbacks? You’ll have to pay closing costs—which average about 3% to 6% of the total loan—and if you’re refinancing to a higher mortgage rate, you could wind up paying more money in interest on your loan over the long run.

Home equity loan or line of credit: Both a home equity loan or home equity line of credit are financing options that let you borrow money using the equity in your home as collateral.

The big difference: a home equity loan provides you with the cash upfront, and you pay monthly installments over the length of the loan (like you do on your first mortgage). With a HELOC, you access the money in small chunks over the life of the loan.

Investment line of credit: Also called an “acquisition line of credit,” an investment line of credit is similar to an HELOC—except it’s issued solely for buying investment properties.

This short-term financing option—with loans generally lasting from about 18 to 24 months—lets you borrow cash as needed, up to a predetermined loan limit. These loans are best suited for people who have experience flipping houses, since borrowers are underwritten and approved based on their demonstrated record of owning or flipping investment properties, and their financial wherewithal.

Crowdfunding: When using crowdfunding, or “peer-to-peer lending,” the funds are raised through the contributions of a large number of people, usually through the internet.

For instance, RealtyShares, a San Francisco–based company that finances investment properties in 35 states, gives house flippers access to more than 38,000 high net worth individuals who invest in a specific transaction for as little as $5,000. RealtyShares funds up to 70% of the estimated after-repair value of a property in as little as 10 days. Interest rates vary from 8% to 11%, with the average loan term on luxury flips being 12 months.

The post 5 Crucial Questions to Ask Before You Flip Your First House appeared first on Real Estate News & Insights | realtor.com®.

5 Common House-Flipping Myths You Should Never Believe

July 2, 2019

eranicle/iStock

We’re willing to bet you’ve seen at least one episode of “Flip or Flop” or any number of other home makeover shows packing the HGTV schedule. There’s no denying the role they’ve played in motivating regular folks to get into the business of buying distressed houses, renovating them, and selling them. Easy-peasy, right? Fun, too! Glamorous, even.

But the reality is a bit more complicated than these heavily edited TV versions of real life would suggest. In fact, there’s an awful lot about flipping houses that the average investor probably doesn’t know. Below, we shed light on the myths about home flipping that buyers should never let cloud their judgment.

Myth 1: It’s easy to flip houses

We have real estate TV shows to thank for fueling the idea that it’s possible for anyone with a contractor and a sense of design to flip a house. The truth is, flipping a house can be a big challenge.

Just for starters, a contractor may not show up, or an insurance claims adjuster may not get back to you in a timely fashion. These are the kinds of things that can derail your project pronto.

And of course there’s always the possibility of hidden problems and repair costs.

“Problematic septic systems, rotten trusses, and unstable foundations can eat your profits alive if you’re not careful,” according to Brian Rudderow of the real estate investing firm Tactical Investing, in Colorado Springs, CO. “Every second of wasted time is another mortgage payment that you will be responsible for making.”

Myth 2: A house flip can be done quickly

On the small screen, home improvement gurus flip a house in a month or two, but Rudderow says house flipping can be an extremely complicated process, and sometimes a time-consuming one as well.

“You have to deal with homeowners insurance, taxes, utilities, permits, inspections, appraisals, title insurance and closing costs, possible HOA fees and special assessments, liens, insurance claims, shady contractors, materials being delivered late or incorrectly, and much more,” he says.

Experts can fully gut and flip a house in a month or two, but it’s because they have plenty of knowledge and experience under their belt.

Myth 3: Flipping houses is a way to get rich quick

Flipping houses can help you build wealth, but it’s not a path to immediately profitability.

“It normally takes first-time home investors much longer than they expect to complete a quality renovation, and they often make the mistake of forgetting that they will have to carry costs during the remodel,” says Andrey Sokurec, property investor, trainer, and owner of Homestead Road, in St. Louis Park, MN. Those costs include the actual price of the home, closing costs, and renovations.

On average, Sokurec says, an investor makes about $30,000 in profit on a flip. “But you also need to be prepared for the reality that you can actually lose money on a deal if surprises come up.”

Myth 4: More money, more profit

So, if $30,000 is the average amount investors make, you might think that flipping a more expensive house can yield substantially higher profits. But this is not necessarily the case.

“The more expensive a property becomes, the more limited your buying demographic becomes. This can mean longer holding costs,” says James Judge, an agent at HomeSmart in Phoenix who has designed and flipped over 50 homes in the past five years.

Myth 5: You need loads of cash to flip a house

Yes, an unlimited budget will make flipping easier, but that doesn’t mean you need a boatload of cash to pull off a successful flip. If you don’t have a large nest egg, Sokurec says, you can take out a home equity line of credit or get a business loan.

“Loans can come from a bank, mortgage broker, or private lender,” he says. In fact, most first-time investors borrow the money from friends or family. That’s because people without house-flipping experience will have a more difficult time getting financing.

The post 5 Common House-Flipping Myths You Should Never Believe appeared first on Real Estate News & Insights | realtor.com®.