High Home Prices On A Flip Require Skill
When home prices are on the move, there’s money to be made. Scoring a nice price on a home flip can make you feel like a million bucks.
But don’t kid yourself. Buying a home and trying to “flip” it by fixing it up fast and selling it for top dollar can be harder than you expect. You need the right skills, resources and funding to profit from flipping. Patience and perspective help, too.
Plenty of everyday folks are dipping their toes in the home flip pool. Before you dive in, learn what’s needed to succeed and how to avoid common mistakes.
New Data On Home Flips
New research from ATTOM Data Solutions sheds light on the latest home flip trends. Over two-thirds (69 percent) of all single-family homes and condos flipped in the first three months of 2017 were by “mom-and-pop” types (non-professional investor couples or singles).
These moms and pops finished one flip during that quarter. By contrast, mid-tier flippers comprised 20 percent of all flips and did two-to-nine flips in that quarter. And top-tier flippers (11 percent) managed 10 or more flips over that time.
A closer look reveals room for improvement for moms and pops. They’re taking longer to flip and getting worse deals than top-tier flippers. The former take an average of 194 days to complete a flip, versus 138 days for the top-tier folks.
Moms and pops also pay over $208,000 for most homes they flip, compared to around $153,000 for pro flippers. And 36.4 percent of flips by moms and pops require outside financing, versus 17.3 percent for flip experts.
What The Numbers Mean
Daren Blomquist, senior vice president for ATTOM Data Solutions, says he didn’t expect some of these findings.
“More than two-thirds of investors flipping homes are flipping one home per quarter at the most. This is somewhat surprising, given that home flipping is best-suited for a full-time, professional investor — someone who could scale up operations to maximize profits from flipping,” Blomquist said.
But, he adds, note that the average gross profit per flip is $64,000, not including rehab and carrying costs. That means flipping one property a quarter could create enough income to support a mom-and-pop investor who chooses to flip full time.
Blomquist notes that moms and pops flip less during housing downturns. Now that we’re in the midst of a real estate boom, they’re flipping more.
Getting To Know Mom-And-Pop Flippers
Blomquist says moms and pops often pay more for a flip and sell for less for a few reasons.
“Moms and pops more reliant on financing rather than using their own cash to buy typically have less leverage to negotiate a good deal. They also may not be as savvy as the higher-volume flippers. Thus, they’re more likely to overestimate the value of a home,” says Blomquist.
Also, mom-and-pop flippers may not be as willing or able to target the best bargains. These include highly distressed properties that need more major rehab and, as a result, sell at a deeper discount.
“Home flipping is a bit of a hybrid industry with some barriers to entry for mom-and-pops. But it’s not as hard as building new homes. Hence, it can attract the less sophisticated and less well-capitalized real estate investor,” he says.
One factor that draws more moms and pops to the flip market during boom times is the ease of financing.
“During the last boom about a decade ago, flippers took advantage of the less strict rules and generally loose lending available to all. That’s when nearly two-thirds of all home flips were purchased using financing,” says Blomquist.
Today, it’s tougher to secure a mortgage loan for a home flip. Interest rates can be higher, too.
The good news is that a growing number of companies and private equity firms provide loans to home flippers nowadays. Plus, short-term purchase and rehab loans may not require as much income documentation as a typical mortgage loan.
“In some ways these loans are easier to qualify for than a conventional loan. That’s what’s helping to draw more mom-and-pop flippers into the game,” he says.
What’s Needed To Be Successful
Blomquist says a good flipper candidate is someone who has been mentored by a successful flipper.
That means working closely on flipping at least one home with that mentor for six months or more. Watching TV shows about home flipping is not a substitute for this real world experience.
“This person should, as well, have a team in place to handle every aspect of the flipping process. This includes finding, financing, inspecting, rehabbing, marketing and selling the home,” he says.
“You should also have a lot of time to devote to a flip. In a mom-and-pop operation, at least one of the two should be devoted full time to the flip.”
A person with no experience, no team and no time to devote to the process need not apply, he adds.
“You have to be disciplined, detail-oriented and perform as much due diligence as possible. You can’t fall into paralysis by analysis, either,” says Blomquist.
“Some luck is involved as well. And it’s smart to build a bigger margin for error into your numbers than you expect. After all, hardly everything goes 100 percent as you planned.”
For best flipping results, Blomquist offers these suggestions:
- Search in your neighborhood or other area you know well.
- Become very familiar with what buyers are looking for in a house. Learn what amenities sell well in that area. “You want a house that almost every buyer will pick first because of your price and inclusions,” he says.
- Stay disciplined with a purchase offer. “Decide what you want to offer and stick with it, even if you lose out on the deal,” says Blomquist.
- Leave a large margin for error in your budget. It may cost more to rehab and take longer to complete it.
- Be conservative in how much you think the property will sell for once you list it.
Like all investments, knowledge is power. But there is also an element of luck involved.
What Are Today’s Mortgage Rates?
If you require mortgage financing, to pull off a flip, the less you pay for your loan, the more you make on your investment. That said, when you aren’t holding a property more than a few months, the interest rate is less important than the upfront costs and thespped with wich you can close your loan.