Flipping Out

flip houses

// by Claire Goforth

Inspired by shows like A&E’s Flip This House, HGTV’s Flip or Flop and TLC/Discovery Channel’s Flip That House, many would-be entrepreneurs are flipping out about flipping houses. After all, who doesn’t want to make lots of money working for themselves in an exciting industry? But home flipping—buying, improving and reselling a home for profit—is much more complex than it is portrayed on television.

That said, with a little bit of savvy, even a first time home flipper can turn a profit.

• Forget buying on credit. Ethan Gregory, local realtor with Allison James Estates & Homes, says, “Most of these properties are going to be in need of some sort of repair which means they won’t pass housing inspections.” Passing a housing inspection is a prerequisite to obtaining financing, so you will need to either have substantial startup capital or, like Gregory did when he was flipping houses from 2004 to 2008, rely on investors.

• Incorporate. Professional local home flipper Kim Finch, owner of COD Homes of Jacksonville, says, “Establish yourself as a business. You definitely don’t want to do this on a personal level.” That way any unforeseen liabilities will attach to the business, rather than your personal assets.

• Know your market. The distance of one city block can make a huge impact on price and how long it takes to sell. Understanding the local real estate market is key to successful home flipping. Gregory says that before buying, you should know “owner/occupant rates and…the values in that area, because it’s going to be a few months before you can sell.”

• Get expert advice. A good title attorney will ensure there are no title defects that can affect your ability to sell; a licensed Realtor can improve your understanding of the market and condition of the home, as well as help you buy and sell; and a home inspector can inform you of potentially expensive defects. “I don’t necessarily get home inspections. But sometimes it comes back to bite me in the butt,” Finch admits.

• Be cautious but not risk adverse. Real estate is, by nature, a risky business. Some risks are worth taking. “The uglier the house, the better the deal,” says Finch, who loves flipping homes with pools, which she says a lot of house flippers avoid, but avoids houses with mold issues, which others love to use as a negotiation tool to lower the price. Figure out what risks you are comfortable with.

• Draw the line. Accepting certain risks can improve your profit margin; others can blow it. “Leaking roofs are always a big one. So are sagging foundations, large cracks on exterior walls,” Gregory says. Finch agrees that it is wise to steer clear of serious structural defects, like cracked foundations, because the costs to repair can easily put you in the red.

• Choose contractors wisely. “You need to have a good list of contractors that you can rely on,” says Gregory. Finch, who flips between 15 and 20 houses a year, adds, “Make sure they’re licensed and insured. That’s a huge one. Number two is get references. Make sure you have references that you can verify.” • Budget for the unexpected. Almost every single flip is going to cost more than you expect. Adding a fixed percentage to estimated costs can help protect your bottom line. “I learned that lesson with termites,” Gregory says.

• Don’t over or under improve. Finch says that beginners often spend too much on improvements. Bear in mind that certain upgrades may be crucial to selling a home in one location but will not increase, and can actually diminish, likelihood of sale in another. Use homes in the neighborhood to help figure out where to draw the line.

• Remember the end game. Gregory and Finch agree that kitchen and bathroom upgrades are going to give the biggest return on investment. But don’t blow your budget on granite when you have a wood rot issue. “You need to be aware of what repairs the home will need to pass financing for their end buyer,” Gregory says.

• Diversify. Before you blow your 401K, remember that flipping houses can be a lucrative, rewarding profession, but it can also ruin you. Stick to a diverse investment strategy that reduces overall risk.

• Sell, sell, sell. If you’ve done your homework, hired quality professionals and stayed within budget, in theory, your home should sell quickly and profitably. The trouble is that theories often look good on paper but not in practice. So go the extra mile, such as by staging the home or adding Florida-friendly landscaping. And don’t be afraid to switch Realtors if yours isn’t meeting expectations.