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Seven Ways to Flip a Property
Author: Attorney William
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, Refi & 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!
About the Author:
Written exclusively for Legalwiz.com by
Attorney William Bronchick, Certified Registered Nationally-known attorney,
Author, Entrepreneur and Speaker.
