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
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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?

Choosing the Right Bathtub in Your Remodel

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Free Online Room Planning Tool!

If you're working on a remodeling project or a home addition, it's sometimes hard to try to visualize how everything will look and where it will all go. You may be planning on buying new furniture or you've got existing furniture and you want to see if it will fit. You might just be considering ways to move your furniture around in your living room, too.

Well, I've found a neat tool that could help you see your room configuration a little better. It's a room planner from a furniture site called Raymour & Flanigan.

It's free to use. You may need to have the correct software to enable it but they have a link for the player. It could come in handy when you're planning a remodel.

It allows you to print up your designs after you're done. It even has an option to email it to your designer or contractor.

Planning Is The Most Important Part of Any Remodel:
If you don't have everything ready when you're starting a remodeling project, you're going to spend more money that you expect. Count on it.

When you don't plan every little detail, you will have to make changes. Changes mean more money, more delays, and more problems.

Start talking with a general contractor early and often so you won't have to make changes down the road. Plan like crazy and expect the unexpected.

20 Questions for Your Architect

Here are 20 questions to ask an architect to make sure your remodeling or building project is a complete success. These questions come from the New Hampshire chapter of the American Institute of Architects (AIA)

20 Questions for Your Architect

1. What do you see as important considerations in my project? What are the challenges of my project?

2. How will your gather information about your needs and goals?

3. How will you establish priorities and make decisions?

4. Who from the architecture firm will I be dealing with directly? Is it the same person who will be designing the project? If not, who will be designing it?

5. How interested are you in this project?

6. How busy are you?

7. What sets you apart from the other architects I could hire?

8. How do you establish fees? When will fee payments be expected?

9. How will I be able to relate fee payments to milestones in your scope of work?

10. What would you expect the fee to be for this project?

11. What are the steps in the design process?

12. How do you organize the process?

13. What do you expect me to provide?

14. Do you have a specific design style? Can you show examples of past design work?

15. What is your experience or track record with cost estimating?

16. What will you show me along the way to explain the project? Will I see models, drawings, or sketches?

17. If the scope of the project changes later in the project, will there be additional fees? How will these fees be justified?

18. What services do you provide during construction?

19. How disruptive will construction be? How long do you expect it to take to complete my project?

20. Can you provide a list of past clients with whom you have worked?

If you need to find a local architect, home engineer, or design-build firm you can use the free resources of ConstructionDeal.com. We'll match you with a local architect firm to discuss your building, home addition, or home remodeling project. It's a great service that can save you time and money and there's absolutely no cost to use us (and you're under no obligation to hire any of the quality architects in our network!)

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Source - Stu Silverman

The Home Improvement Penalty

Doing any home remodeling project on your own can have a dark side. People love to watch the DIY Network and HGTV to see all the home improvement shows and renovation projects.

The problem is - they make it look rather easy. They don't show you the team of carpenters, subcontractors, assistants and even the show's producers all doing work "in the wings" to make the finished room. They also don't show you all the expensive tools they use.

So many homeowners decide to save a little money by doing the project themselves. And the results are not always up to standard. I found this article by David Bradley that talks about the Do-It-Yourselfers Home Improvement Penalty:

According to real-estate agent Nancy Raddohl, many of the potential buyers that she brings to a house notice a do-it-yourself project... right away. "'A buyer's first impression is I don't want to go any further into the house. They won't get beyond the front entrance," the suburban Minneapolis-based Raddohl of ReMax Carriage House said."

"Raddohl's candor is a zinger through the heart of homeowners who may think their handiwork is up to professional snuff. Quality upgrades can add value to a home, but shoppers easily are turned off by badly executed projects. The listed price can drop accordingly."

"Errors are especially onerous in highly visible glamor rooms such as kitchens and baths. Even minor miscues such as sloppy painting can have a negative effect on buyers."

"So before you power up your hand tools, consider this: Sellers risk thousands of dollars of their asking price because of shoddy workmanship. It's common lore among real estate agents that buyers set the value of a home, not the seller."

"I call it 'the home-improvement penalty.' Thinking your end result is good enough won't cut it in remodeling circles.'"

"Of course, this deflates do-it-yourselfers who puff their chests in pride at a job well done. So what if drywall seams show or spacing between bathroom tiles is a little off? To buyers, however, any glitch is a big deal."

"Even little errors may cause buyers to turn tail to the next property. Their perception is the seller's reality: If one thing is wrong, are there other problems very far behind?"

"Homeowner mistakes can be pounced on by real estate agents and contractors. Raddohl won't hesitate to make poor work a negotiation point to shave thousands off the listed price. Using the example of an amateurish countertop, she said she would advise buyers to press the issue."

"'I'd ask sellers to have work redone, and it could cost $5,000 or more,' she said. The repair costs come straight out of the seller's pocket.'"

"Contractors equally are keen to benefit from improvements gone bad. If a bathroom project goes down the drain, a contractor knowing the homeowner is over a barrel for needed repairs may be less inclined to negotiate and can charge top dollar."

"On top of materials and labor, homeowners also may be stuck for structural repairs if a job that really went haywire caused damage to portions of the home."

"If a project doesn't fit a contractor's schedule, the eyesore could serve for weeks as a reminder not to take home-improvement projects lightly."

"There are other risks, too. Homeowners inadvertently may skirt local permit requirements. Even if the work is passable, appraisers or building inspectors may nix a project weeks, months or years after completion and require work be redone to meet local codes."

"Again, homeowners will dust off their checkbook to pay for mistakes."

"The bottom line: Homeowners must bluntly assess their DIY abilities."

"Impressive work involves more than skills. It also requires the right tools, materials, planning and project management."

You can read more about the home improvement penalty on rgj.com.

The author of the article also has a checklist that you should go through before you begin any home improvement project:

• "Do I have all the skills to do the job right the first time?
• Do I have the time to acquire the skills or to do the work?
• Can I commit to performing the work to a professional degree, or will it look as if an amateur did it?
• Are all the right tools available? Can I afford all the right tools?
• Have I planned for all the details to make sure the job looks good?
• Do I need a license for a task that involves electrical or plumbing prowess?
• Am I balking at hiring the work out just to save money?
• What do I risk if I do the work myself? Will I lessen the value of my home? Is there a risk I will damage the home?"

If you don't want think you like the answers to these questions, you can always find a quality professional through ConstructionDeal.com. On our site, we can match you with contractors and remodeling companies in your area - at no cost.

You're under no obligation to hire anyone, but it's a great resource to save time and money: you won't search at random through the yellow pages, leave messages, and repeat your plans over and over again (saving you time.) You'll also get multiple quotes on your project, allowing you to choose the right bid and company for the job (saving you money.)

Time to Rethink the Ceiling Fan

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