Flipping houses after the housing market crash
Just a few years ago, buying houses, waiting a few months and then turning around and selling them, was an easy way to make big money. No sooner would you purchase a house with little or no money down then it would go up by a nice margin and you could sell it for a tidy profit. The practice, known as "flipping" worked great when the real estate market seemed to be rising every day.
People that had absolutely no real estate experience were suddenly becoming "experts" on real estate investing. They saw their friend or neighbor collecting $20,000.00 checks while sitting at home watching TV. Naturally, they wanted to get in on the action and make some easy money. With no background in how the real estate market works, many people over extended themselves and found that they owned a million dollars worth of house and only had $5,000.00 or $10,000.00 invested in the game. Once demand started to dry up and prices stopped appreciating and started to drop, investors found they could not make a profit on most houses they had bought to flip. Thus began one of the worst housing crashes in history.
As the Federal Government, banks and other institutions have taken steps to slow the housing decline, deal with foreclosures and hopefully get the real estate market back to equilibrium, so called house flippers are starting to reappear. Perhaps they are the same people who wound up holding the bag and watched as their net worth turned negative. Perhaps they are new investors hoping to take advantage of the depressed real estate market by buying considerably undervalued homes at distress prices. In either case, there are opportunities out there, but if history can teach any lesson, it is that flipping houses is not for the faint of heart. There is a level of risk that is not appropriate for everyone. Be extremely cautious before jumping on what seems like a great deal.
There is a very good reason why houses that once sold for $700,000.00 are now selling for just $400,000.00. They may be high quality houses that most people would love to live in, but there are just too many of them. When supply exceeds demand, the basic laws of economics takes over and the price is forced down. With such a glut of houses in foreclosure or about to be foreclosed upon, there is an unnaturally high inventory of homes on the market. Banks do not want to own them. People can not afford to pay for them. Unfortuneately, it will take time and plenty of suffering to reduce the inventory of homes and bring more stability to the real estate market.
If you are going to try to flip houses in the current real estate market, you will have to be much more careful about the house or houses you target. You really need to know the "value" of the house. You must do a market analysis of recent sales where the house you are considering is located. Knowing comparable sales data is the best way to know the market value of the house. Armed with a good estimate, you will need to make an offer well below the sales price of similar homes in the neighborhood. There are still plenty of desperate homeowners, foreclosures and other distressed properties that an individual or a bank wants to unload. Make an offer at least 20% below the price you believe the market will support and see what happens. Remember there are plenty of opportunities out there and you are dealing from a position of strength.
One way you might be able to guarantee success in flipping a house is to buy what is commonly referred to as a "fixer-upper." If you are handy and can find a house that needs mostly cosmetic upgrades, you can get an extra discount on the purchase price and have more room to work with when you attempt to sell it.
Another possible strategy is to offer potential buyers the opportunity to rent with an option to purchase. That way, you will have cash flow that should cover the mortgage payment and you can wait out the slow housing market. It is very possible that after 5 years or so, the house will have once again started to appreciate and you can earn a good return on your investment.
Finally, remember banks are not overly anxious to lend, especially for speculative ventures. The stronger your financial situation, the more likely you will be able to obtain financing and suceed in the house flipping business.