House flipping has been a popular form of real estate investment for several years, even inspiring several television programs. Unlike many types of real estate investments, house flipping is a very “hands on” process, often requiring a significant investment of time in addition to money. This includes not only repairs and remodeling, but also extensive research into the neighborhood and surrounding area. Once a prospective house flipper has done their homework, it can be a lucrative type of investment. San Diego real estate investors should consider both the potential risks and the possible rewards of house flipping.
What Is House Flipping?
The process of house flipping consists of three basic steps: (1) buying a property, (2) fixing the property, and (3) selling the property. In order to make money on a house flip, an investor must choose a property carefully, paying close attention to both the need for repairs and the prospects for resale. The sale proceeds must cover the purchase price, the total cost of repairs, the costs of sale, and any real estate agent commissions before there can be any profit.
Money and House Flipping
As the saying goes, you have to spend money to make money. With house flipping, this includes buying the property and repairing the property. As with any real estate purchase, not all investors have enough cash on hand to cover the full purchase price. House flipping frequently requires financing, which might include bank loans or hard-money loans, depending on the circumstances.
House flippers rarely purchase a property from a homeowner at or near market price, since it would be nearly impossible to turn a profit. Instead, most house flippers look for distressed properties that are likely to increase in value with some repairs. Foreclosure auctions are a common way to acquire distressed properties. Short sales involve purchasing properties whose owners are underwater on the mortgage and negotiating the payoff of the mortgage loan. A buyer might be able to purchase a property below the market price, since the seller’s goal is to pay off the mortgage debt.
House Flipping Repairs
Repairing and remodeling a house to make it marketable is certainly the most “hands on” part of the process. Investors can save money by doing repairs themselves, although the cost in time and energy can be significant. House flippers should have reliable contractors available the moment they are ready to start repairs to avoid excessive carrying costs. Knowledge of local building codes is also essential.
A critically important part of the repair stage is the accurate estimation of costs. Flipping a house requires a plan that covers all of the needed repairs and makes additional improvements but that does not overdo it.
Liability and House Flipping
Throughout the house flipping process, investors must be aware of potential liabilities. If a house flipper operates through a business entity like a limited liability company (LLC), they may be shielded from some, but probably not all, liabilities. Unless an investor has a strong relationship with a bank or hard-money lender, for example, they might have to personally sign a note for a loan, making them individually liable for the loan amount if they are unable to sell the property as planned. During the repair phase, the investor, as the owner of the property, is liable for any injuries that might occur on the premises.
If you are interested in flipping properties in California and want help buying and selling, please contact Jarod Bona of Bona Law, who affiliates with Beal Real Estate for Real Estate brokerage services.
More Blog Posts:
Financing a Real Estate Development in California, Titles and Deeds, October 30, 2017
Hard Money Lending for California Real Estate Investments, Titles and Deeds, October 5, 2017
California Real Estate Agents’ and Sellers’ Duty of Disclosure to Prospective Buyers, Titles and Deeds, September 18, 2017