The whole point of flipping a house (or any investment property in general) is to spend X dollars in return for Y dollars. If Y – X = a positive number then it’s a profitable investment for you; if Y – X = a negative number, then you likely need to find other ways to make money.
If you watch Flip This House or Flip That House or Flip Your Doghouse (okay, I made that one up) or any other house flipping show on television, you don’t have to watch long to notice an obvious trend. Everyone makes money (and I mean everyone, even the most idiot of flippers), hardly any of them do any of the work themselves, and almost all of them are flipping properties in California during the recent real-estate boom.
It doesn’t take much brain power to realize that present day conditions are much different, with real estate values in much of the country deflating, and that while assorted flipping shows on tv are entertaining and useful for potential flippers, they’re not the most realistic of models. Not only are they short on details but most revolve around properties that are profitable flips only because of the ridiculous appreciation in the market in general.
Does that mean that present-day house flippers are doomed, and that the flipping bubble has been forever punctured? Of course not. No matter where you live, there’s probably a property for sale in your zip code that could be a profitable flip. You just have to focus your efforts on the areas that you can extract value from, in the opportunities available to you. One of the biggest opportunities for you is a very obvious one, which is buying properties at a substantial discount to their actual value.
So do you just wave a magic wand and say “Abracazam, I command you to sell your house to me for less than what it’s worth!”? Sadly, it ain’t that easy, but it’s also not rocket science. People sell their houses each and every day for less than what they’re worth, for a variety of reasons.
1) Inherited houses: This is the one I’ve seen the most, as far as finding good flip opportunities when scouting out potential investments. A parent dies, the child or children inherit the house, and all they want is to sell it and cash out, as quickly as possible. This effect is magnified by the fact that many older parents living alone in a home are no longer able to keep the house in good repair, so the houses typically aren’t in the best repair and often haven’t been updated for a number of years.
While it may boggle the mind of flippers and investors, many people who inherit these houses are unwilling to spend a single dime in improvements and repairs, despite those repairs paying off a dollar in asking price for every dime invested. They just want the money, as quickly as possible, and will often sell for far below the actual value of the property, not to mention the potential value once repairs are made.
2) Foreclosures: Nothing fun about dealing with foreclosures, but it’s another obvious way to buy a property at a discount to its actual value. I’m only talking about REO properties here, and not about buying properties at a foreclosure auction or sale (which is similar and can be even more profitable but involve much more work and research than simply buying a REO property that is listed for sale).
The bank or mortgage company just wants to move it and get it off the books, as quickly as possible. This effect, too, is also magnified by the fact that many home owners who are about to be foreclosed on trash the place or don’t otherwise try to keep it in good shape. Again, it may not make sense to investors, but banks or mortgage companies almost never spend a penny on improvements, so in effect you get an additional discount when buying these properties, as many are in a state of disrepair.
3) Frustrated Landlords: This is a much smaller opportunity, but you can sometimes get discounted properties from people who tried renting a house out but realized they weren’t up for dealing with the headache that tenants can be. There’s no real way to target this, as far as looking for particular signs, but it can be a contributing cause in why you might be able to buy an investment property for less than its actual value.
The owner is just tired and wants to be done with it, so they’ll sell it for less than they otherwise might have before dealing with the headache of tenants. If the tenants trashed the place, you might even get a more substantial discount, as the owner says screw it, let’s just sell and doesn’t make any repairs, being willing to take a hit on the sale just to wash their hands of the whole mess.
4) Pressure: Home owners may get a promotion at work that involves moving across the country, a baby might be on the way, or credit card bills might be piling up. There are all sorts of ways that life can pressure home owners into looking for a quick sale, which can lead to them selling their house for less than it’s actually worth.
5) Ignorance: Pretty obvious, but for whatever reason people sometimes sell houses for less than they’re worth. You see this more often in FSBO situations but it does happen with properties sold through agents, as well.
A subset of this is the lack of knowledge by many home owners as to what repairs will really cost. If someone hasn’t worked on houses, they just don’t know what things cost to fix, or how big an issue some problems really are. This is especially true of foundation, asbestos, and mold issues, as the media and other “experts” have trained everyone to absolutely freak out and assume that those problems will cost many tens of thousands of dollars to fix.
While that can be the case, in many cases the issue is much less expensive to f ix than most people (homeowners included) would ever imagine, leading to some nice discounts when buying a home that the previous owner assumes has major repair issues and prices accordingly.
