Flipping Houses: 10 Things To Look for in Investment Properties

I watch the show Property Ladder on TLC and it drives me crazy. You see the house flippers buy a house to renovate as investment property and they always ignore sound advice, spend too much, and take way too long - - and they usually make a boatload of money doing it.

Even in these tough times, with the housing market crashing back to Earth, they're still able to turn a profit. But not everyone is so lucky. Investors and speculators have fled the real estate market in droves. The national inventory of homes for sale is well over a million and a half and rising.

However, in each state, each city, and even each neighborhood there may be an opportunity for you to buy a house, fix it up, and sell it and make a little money.

If you're still interested in flipping a house, here are some tips from Inman News:

TEN ATTRIBUTES OF PROFITABLE FIX-UP HOUSES:
by Robert J. Bruss

1. Basically sound condition without major structural defects. In most communities, this means looking for three- or four-bedroom houses with good foundations and without a major need for renovation other than cosmetic fix-up. Avoid two-bedroom houses unless your town has a strong renter or buyer demand for these smaller homes.

2. Good location with a low crime rate. No matter how enticing a run-down, profit-potential house might be, if it has a poor location there's little or nothing you can do to cure that.

For example, houses next to a noisy freeway or on a very busy street won't appeal to most other buyers except at bargain prices so there is little you can do to raise values in an undesirable location. If most of the nearby houses are run-down and poorly maintained, they will drag down the value of your house. However, if you buy a run-down house in a good neighborhood of well-maintained homes, they will drag the market value of your home up after it is renovated.

3. Good-quality school district. Even when a house is in sound condition in a good location, if the public schools are of poor quality, that greatly hurts the resale value for fixer-upper houses. Always look for houses with school test scores at or above the median for the area where families with children are attracted.

4. Need for profitable cosmetic fix-up work, but not major unprofitable repairs. Examples of profitable cosmetic improvements include fresh paint inside and outside (the most profitable improvement you can make), new light fixtures, new carpets and flooring, and fresh landscaping.

But stay way from fixer-upper houses that need unprofitable work such as new wiring, new plumbing, foundation repairs, major kitchen and bathroom renovation, room additions, and a new roof. These expensive, unprofitable improvements rarely add more than their cost to the market value of the home.

5. Purchase price at least 30 percent below the market value of nearby comparable homes in good condition. "Buy the worst house in the best neighborhood" is a sound motto to follow. Another good motto is: "Your first profit is earned when buying at the right price."

If the seller won't heavily discount the sales price to compensate for a home's run-down condition, keep looking until you find a house with profit potential meeting the criteria explained here.

6. Purchase from a motivated seller who is anxious to sell. Motivating reasons for selling a home include job transfer, pending foreclosure, divorce, health reasons, family birth or death, and unemployment.

If the home has been listed for sale at least 60 to 90 days with no offers, even if the asking price is too high, that is another indication of possible sales motivation so it may be time to make a "lowball" purchase offer.

7. Affordable low-down-payment financing. Taking over an existing mortgage (called buying "subject to"); a lease with option to buy; seller carryback financing; or a combination of these methods indicates probably easy financing.

If the house is in bad shape, avoid obtaining a new mortgage unless it is approved by the lender on an after-fix-up, market-value appraisal. After your fix-up work is completed, that's the time to get a new mortgage, based on the home's increased market value.

8. Seller or tenant will vacate immediately upon transfer of title. The best way to profit from a fixer-upper house is to work on a vacant structure. Attempting to make improvements while the seller or a tenant lives in the property makes the upgrading work doubly difficult.

9. Within a 60-minute drive from your current residence. During renovation of a fix-up house, it pays to visit the property nearly every day to be certain the work is getting done correctly.

When the owner doesn't inspect frequently, the workers often don't show up or they slack off. Incidentally, never pay contractors by the hour (except for minor work) and always pay by the job after it is finished to your satisfaction.

10. Good demand from renters and/or buyers. Unless you plan to live in the fixed-up house, it pays to consider the current demand for houses from renters and buyers. If local employment and economic conditions are good, chances are home values are stable.

However, if more people are moving out than are moving into the community, maybe it's not the right time to invest in a fixer-upper house there unless it can be bought for a 40-50 percent discount off the market value of nearby homes in excellent condition.

RELATED POSTS:
Flipping Houses: A Real Estate Investing Update
How Not to Beat the Bursting Housing Bubble
Ways to Improve Your Homes Value

If you're going to be flipping property - consider bookmarking ConstructionDeal.com! You can use our no cost service to find local contractors and service professionals to fix up anything from the floors, to the roof, to remodeling the entire house.

Here is a full list of our residential categories!

* photo courtesy of TLC network

Flipping Houses: Real Estate Investing Update

The real estate boom peaked in 2005 and the housing bubble has been slowly deflating ever since. Economists say that risky lending practices and speculative real estate investing purchases pushed the home prices high and now we're in the midst of a correction.

But that doesn't stop people from wanting to flip homes for a profit. Interest is still high to buy a bargain home, fix it up, and sell it for a high price.

Is it too late to start flipping homes as an investment strategy?

The short answer is... it depends. America is faced with a supply and demand issue. Home builders built too many homes, other real estate investors gobbled up property only to flood the market, and people are losing their homes to foreclosure. All of those issues have increased the supply of homes for sale in the market.

And, demand is down. Despite the fact that interest rates are good and the job market is strong, potential buyers are worried that the market has not hit bottom. Buyers don't want to purchase a home that they think they could have gotten for less in 6 months time.

Another problem is that too many subprime, risky mortgage loans were made to people who couldn't afford those homes or who had shaky credit. As their payments rise, more and more homes will go back on the market, at low prices, in the foreclosure process. And because lenders will be tightening their credit policies, fewer people will be eligible to buy homes - - keeping the excess inventory of homes high.

What does this all mean to a potential House Flipper?

If the goal is to buy low, renovate, and sell high then this market could be a real problem for a real estate investor. One advantage you'll have in a situation like this -- there are a lot of homes for sale. Homes that can be bought "low".

The problem comes when you compare the term "low." Home prices are dropping and, in most areas, should continue to drop across the country for the rest of this year and perhaps into next year. You could get a great deal on a house compared to 2005 prices. But, if prices really drop in your area of interest, your great bargain might end up being too expensive before you do any renovations.

So, it's all bad news?

Not necessarily. Some areas will still be in high demand and housing supplies are not excessive everywhere across the country. A wise investor who knows the real estate market in their area can still flip homes. Or, if you don't know your investment area, it would really pay to partner with someone who does. A quality realtor knows how to find the diamond in the rough.

The trick to real estate investment in a shaky market like this one is to find the ugliest house in prettiest neighborhood and (here's the key) make sure it's still a neighborhood that people want to buy in to.

What steps are needed to flip a house?

Many people are going to make the mistake of scooping up properties, sight-unseen, that have gone into foreclosure. They may feel that any bargain is a wise investment. They will most likely be wrong.

Many homes will fall into foreclosure in 2007. Many: "The percentage of mortgages that started the foreclosure process in the final quarter of last year rose to 0.54 percent, a record high. The previous high, 0.50 percent, occurred in the second quarter of 2002 as the economy was recovering from the blows of the 2001 recession."

Bloomberg says as many as 2.2 million homes with subprime mortgages may be at risk. It's going to be important that investors not focus on getting a great deal on a foreclosure. As with all real estate decisions, it's still about "Location, location, location." You still want to make sure the home is in a desirable location (the ugliest house in the prettiest neighborhood, remember?)

Next, you want to partner with a contractor who can be available for fast and quality remodeling projects. The renovation process cannot take too long. The home needs to be purchased, remodeled, and sold as quickly as possible. Every mortgage payment cuts into the bottom line.

Make sure you have the home inspected, if possible, before you buy. You cannot afford to put money into needed repairs that are not visible to a potential buyer. Replacing electrical wiring, air conditioners, faulty subfloors, and repairing mold damage eats away at your budget and does nothing to impress anyone during a showing.

When it comes to your renovation plans, less can be more. Remodel the home with aesthetic details in mind (Read: How to Beat the Housing Bubble.) Start with fixing and improving what can be seen. Get the house to appeal to the emotions of a potential home buyer. Sometimes a home can be flipped by just painting the interiors and laying new carpeting. Many times, to realize a true profit, you'll need to go farther.

Start with the Kitchen. Kitchen remodeling is the heart of every home. And the emotional attraction for homebuyers (Read: Budget Kitchen Remodeling.) Kitchen renovations bring in the great return on investment, statistically (if it's done right.) Fix up bathrooms next. They also provide good returns. Flooring and paint are also big parts of any renovation for a flip. Don't go with wild or extreme colors or fixtures or materials - just because you like it doesn't mean the buyer will like it. But don't go with boring white colors or cheesy laminates. Safe, neutral materials and earth tone colors are the best (Read: Paint Color Trends.) Go with stainless steel appliances, granite counters, and hardwood floors. But do not go with the top of the line brand in any product or material you buy. Keep your budget in mind.

Outside, make sure the curb appeal of the house is up to date (Read: Top 6 Landscaping Tips) It's the first thing the potential buyer sees and first impressions really are everything. Cut back overgrowth of bushes and trees. Sod the yard. Fix broken shutters. Paint the house or fix the stucco or siding. Make it as inviting as possible.

What about selling the investment property?

After you've completed your property renovation, you'll need to put the house on the market. Don't try to skimp on selling your house. Many get greedy and try to save money by not working with a good real estate professional at this point. They foolishly believe that they can sell the house on their own. A quality realtor can spread the word in all the right places to make sure you garner attention to your property.

Also, pricing the house too high for the area - in this market - can kill your prospects. With so many choices out there, and so many comparably priced new homes that are still for sale, it's suicide to be greedy on your selling price. Make a splash by having a newly remodeled home at a good price and you may end up with more than one interested party who will give you more than your asking price.

Finally, be prepared for the worse case scenario. You may renovate a house and have it sit on the market for longer than you expect. If the economy tanks and people start losing jobs, you could be stuck with your investment. Remember that there are people who would love to buy the house but cannot sell theirs. And that there are many homes to choose from so you've really got to have a great house in a hot neighborhood. And, there are now fewer potential buyers with the risky loans and tightened credit policies (very few will offer people 100% financing anymore.)

If you can live in the property while you're flipping it, you may curb some of the dangers of being stuck with a 2nd or 3rd mortgage. If the house doesn't sell immediately, you'll be able to live in it and hang on through a tough market.

RELATED POSTS:
How Not to Beat the Bursting Housing Bubble
Ways to Improve Your Home Value
Curb Appeal: Improving Your Homes Look

When you're ready to renovate - submit your remodeling projects on the ConstructionDeal.com website. It's a fast, free and easy way to get multiple bids on your jobs. Just post the project and wait for quality pros to contact you. It's also a great way to make sure you have a backup contractor in case one you've chosen is not available fast enough.

Producers of the show "Flip This House" use ConstructionDeal.com find contractors. What more of an endorsement do you need?