Times are tough and many have turned to entrepreneurial ventures to make ends meet. “House flipping” – whereby a fixer-upper property is sold quickly for a profit – has attracted its fair share of individuals seeking alternative ways to make some extra money.
However, as attractive and glamourised as house flipping has become, it has the potential to sink buyers in a financial quagmire.
According to Adrian Goslett, CEO of RE/MAX SA, there are certain property investors who specifically look for properties in need of renovation because they know that firstly, there will be far less competition in the market for these homes, and secondly, these properties are generally priced below their market value. From an investment perspective, he says that this provides the potential for a substantial return on investment at resale – provided that the cost of fixing the property doesn’t outweigh the possible profit margin.
According to investopedia.com there are five key points to consider before taking the plunge into the flipping pool.
Money: Dabbling in real estate is an expensive exercise. The first big expense is the property purchase itself. Whether you’re financing it through the banks or out of your own back pocket, there are some hefty costs involved including transfer fees, conveyancing costs, property inspection fees (a must for properties of this nature) rates and taxes, the renovation costs, capital gains tax and interest payable on your loan (if applicable) – all of which eats into your profit margin. If you plan to fix the house up and sell it for a profit the sale price must exceed all of these combined costs. For those interested in determining the fair market value of a property, Lightstone offers property valuation reports.
Time: Engaging in fixer-upper projects is a time consuming affair. It can take months to find the right property and have it inspected, and even longer to have it transferred into your name. Once you own the property, you’ll have to invest a fair amount of time to get it up to scratch, market it and go through the transfer process again. If you don’t have any money coming in during this time or are depending on the sale of the property to make ends meet you could find yourself in a sticky situation.
Skills: If you’re a builder or carpenter by trade, there’s a good chance that you could realise a tidy profit from flipping properties. However, if hanging pictures comprises the extent of your DIY experience, chances are you are going to have to hire professionals which will cut into your profit.
Knowledge: Heard a story about someone making a killing from selling a refurbished fixer-upper? Think it’s a good idea to quit your day job and go into flipping full time? Think twice. You need to have a fairly good grasp of property fundamentals before investing all your time, effort and money. For instance, you need to understand the importance of location, what the market is really prepared to pay for the property, what renovations to make or skip, property type and demand, the basics of good property design and layout and what legislation and taxes apply.
Patience: Novices rush out, buy the first fixer upper they come across, hire the first available contractor to slap on a coat of paint and expect to turn a profit within a month or two. Savvy investors wait for a viable property, fix it up themselves or negotiate rates with reputable contractors and understand that it takes time to sell properties – sometimes for a slim profit. If patience isn’t your forté, flipping isn’t for you.
Ultimately, the overall condition of a property will determine whether or not it’s a viable flipping option. As a general rule the home should, at the very least, be in a liveable condition from the start.