When a home is purchased with the intent of fixing it up, possibly enlarging it or changing the use and reselling it, it is commonly referred ot as flipping.
The major benefit of flipping is that you recoup your capital in a very quick period of time so you can turn your money over into another investment. Obviously the faster you do that, the higher your return is. There are disadvantages to flipping, however.
It’s expensive to buy or sell property. Closing costs on both sides of the transaction need to be taken into consideration. If you are trying to recoup 4, 5, 6,000 in closing costs to buy the property and then spend 10,000, 15,000 or more to sell the property, that means you will be asking substantially more than what you paid for it just to break even.
When you start construction to refurbish, expand or change the property in whatever way you had planned to make it more valuable, you may discover that you miscalculated somewhere along the line or you may come across a surprise that will affect that bottom line. That’s why it is extremely important to do your homework before you purchase when you are flipping. An oversight or a mistake can cost you dearly when you don’t have the time to absorb the loss.
And talking about time, that is the other major factor when you are flipping properties. If you figure you will be able to make your repairs or changes and resell the property in 90 days but it actually takes 120 days, you have just diminished your anticipated profit by 25% even if everything came in right on budget. The more difficult the market, the harder it becomes to predict how long it will take to resell something.
Many investors believe that the most important single factor in an investment is how you purchase it. That is definitely true with flipping also, but how you sell it can make or break a “good deal.” It is wise to have several methods available for reselling and, if possible, you may want to find the ultimate buyer before you even purchase the property yourself.
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