House-Flipping and You

Lots of readers of this website seem to be interested in the topic of "house-flipping". So here's a bit more information for those of you who think you might like to try this.

First of all, be sure that the money you put into this is money you can afford to be without for awhile. After all, there are no guarantees. With the interest rates on mortgages rising and inflation looking like it's getting a foothold, it's quite possible that housing prices could either soften or correct. Either way, it won't be a good time to "flip" if you get caught in the middle of that. And unfortunately, you won't necessarily see it coming. It's just like the "tech bubble" on the stock market. I knew lots of people who lost money on tech stocks then (me included), and we all thought we knew what we were doing. So be warned.

Having said that, if you really think this is something that you'd like to do, keep in mind a number of factors:

1. You should be buying in a market which is still "hot", even though the fall is coming on. Since the market in most places will take a bit of a dip in the fall, if yours is still chugging along, you are likely in a better position. Some places in the US still have significant increases in housing prices happening. If the market is good now, you have a better chance to make a profit come spring. (And spring to summer is the best time to sell. Selling in the winter will likely knock several thousand off your sold price.)

2. Keep in mind that the best time to sell is the summer. I was told by a local real estate rep just this year that the biggest closing day in real estate is June 30th. People want to get their kids through the school year, and then move them and settle them into the new place before the next.

3. Don't buy what you can't afford to carry for at least 6 months. If anything goes wrong with your plan, you need to have a financial cushion that will keep you afloat until you can sell. If you have to sell in a panic, you are more likely to get less for the property.

4. Are you buying to renovate and then sell? Amazingly enough, I knew a guy in HIGHSCHOOL who did that for his summer job! His dad bought his first house for him; the guy worked for about 6 weeks, from early June to mid July to get it renovated and upgraded; then he put it on the market to be sold before September. He drove the best set of wheels in the school parking lot, as you can imagine. It can be lucrative to do this, but be sure you know the house you are buying. It should be without major structural work to be done. What you want is a place that someone has let "run down" and for which the work is mostly cosmetic. If you have to depend on contractors and the like, you could get caught. If my experience with buying a newly built house is any indication, contractors are notoriously likely to run over dates and delay the finish of a project because of problems with timing or weather. If you can do it yourself, you'll likely do better.

5. Get some advice from a legal expert on what your obligations are, especially if you are going to rent. Also find out what the drawbacks could be. If you need to rent before you can "flip", this is important information. As the boy scouts say: Be prepared.

If you buy now, with enough money in your pocket to be able to carry the property if you have to, and a willingness to rent if the market does go soft, you really can't go wrong. For that matter, even if you buy now and rent the property, there's nothing which says that you can't decide to put it on the market next year. If you think you'd like to do that, interview your prospective tenants very carefully. You will want someone who will take impeccable care of your property so that it will be ready to show when the time comes to sell -- whenever that is.

Is the housing market going to soften? It's quite possible. As my wife and I continue in our favorite hobby of watching the real estate listings, I'd say that our local housing market is already showing some signs. Now, is that just the normal "fall and winter doldrums", or is it a longer-term challenge? I don't think anyone can tell you for sure right now.

That's why it makes sense to prepare for more than one way for a housing investment to go -- either long term or short term. If you are in the position to do that, you should be able to weather whatever happens, and enjoy flipping either now or later.

Michael

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