It doesn’t take long for a viewer to find a TV show highlighting house flips. Shows have been glamorizing the house flipping industry for years. Flip or Flop, Property Brothers or Fixer Upper have led to self-described real estate gurus traveling the country offering fans the opportunity to purchase their classes and learn how to flip a property. These TV shows and classes offer the promise of large returns and a new lifestyle for those that follow the program. I have found over the years that these classes don’t always provide a realistic breakdown of costs and risks. During this blog I will discuss a typical flip transaction, highlighting costs and expectations. Then over the next 2 blogs I will discuss property acquisition for flips and the challenges of repairs.
Purchase – After you have identified the property, tied it up with an executed contract and performed your pre-acquisition inspections your next step is to complete the purchase. When watching a flip TV show they don’t overly focus on this step in the process and costs associated. In addition to the purchase price you typically will have to pay an attorney/closing company, title search fees, title insurance, recording fees, property insurance as well as pro-rations of property taxes and homeowners association dues (if applicable). Different localities may have additional recording fees, deed stamps and utility charges. For your purchase I always recommend finding an experienced real estate attorney to handle your transaction. I like to compare it to seeing a cardiologist for your heart verses your general practitioner. Your local attorney that writes wills, handles DUI cases or personal injury lawsuits may be legally allowed to close your real estate transaction but the attorney’s that specialize in real estate will typically close your purchase faster with less hiccups. Additionally I always recommend you purchase title insurance to protect your investment. Title insurance will compensate you in the event an unidentified judgment or lien shows up after closing or an easement exists that was not recorded that changes your property’s use or value. Also make sure you purchase the correct insurance policy on the property, insurance companies offer a 3 or 6 month vacant policy that costs less then the equivalent annual homeowners policy that you would have on your personal residence. This policy has different coverage so make sure you discuss it with your agent.
Holding/Marketing Period – After the excitement of purchasing the property the work continues. During this time you must handle completion of all renovations and repairs in addition to covering costs of being an homeowner – HOA dues, power and water bills, landscaping. After completion of repairs the marketing period begins (it should be noted I will have a separate blog coming up in 2 weeks that will detail repair challenges with flips). During this time frame an experienced real estate agent will work with you to create a sales buzz around the property. This may include professional photos, digital marketing, open houses and broker events at the property. Working with a good agent can help investors profit during flip deals, however I always recommend the investor become a real estate agent themselves. This will allow them to handle the listing and sales process in addition to saving commission on the sale.
Sale – This is the celebration of a successful flip. At the closing of the sale an investor will have their final additional costs to include commissions, attorney fees, recording fees and perorations. During the episodes of your favorite flip TV show they typically don’t highlight all these additional costs. After deducting these costs from the sales price and then accounting for all your purchase, holding and repair costs you will have your profit.
Most investors that flip properties are business men that are open to ideas. If you are interested in flipping a property, I recommend you find some flippers in your local market and reach out to them. Many will consider partnering with you, especially if you have already identified some properties that they might be interested in. During your first partnership with an experienced investor I would not focus on how much money you want to make but focus on learning. Giving up profit to the investor to learn from them and watch how they handle the process in addition to building that relationship will increase your future returns for years to come. All experienced investors have a network of vendors and experts that are part of their success. Access and information are the primary keys to long term success.
By: Nick Sowers BIC
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