When you are thinking about investing your money in property, most people would be familiar with fix and flip concept. Not to mention that DIY channels like HGTV often portray people’s success in fixing and flipping,
earning them tons of money in the end. Although this concept may seem like an ideal way to make (a lot of) money, it’s not for everyone. If you are interested in doing this, you should ask yourself, would you be ready with all the responsibilities and possible challenges that may come along the way?
What Is House Flipping?
House flipping refers to investors buying a house with the main purpose to resell it. However, before they sell the house (which will likely take place within a short time after the purchase), they fix it first so they can buy it with higher price.
In most cases, these investors are able to buy the house because of its condition: whether it’s too deteriorating or basically in a wreck condition. So, the breakdown for a house flip is that investors buy a house, fix it (or restore or renovate it), and then resell it again with higher price, and all of these happen in a short timeline after the purchase; typically within 12 months after the first buy.
Many of the house flippers don’t actually have their own funds. They turn to real estate lenders to help them with the finance. Every lender has their own requirements and terms, but generally, they are willing to provide financial assistance for 12-month flipping project.
They are willing to do so because they know that they can make profits without getting more than a year period. Some lenders, however, may be willing to extend their loan for more than ‘just’ 12 months.
Different Flipping Categories
Do you know that there are different categories for fix and flip?
- Wholesaling. The wholesaling property is basically assigning the purchasing contract to your next seller. You can do the sales through a double escrow: one for the purchase of the investor and another one is for the second investor (or also known as the end user). Wholesaling can also refer to purchasing a house without fixing or remodeling it and then resell it fast.
- Wholetailing. In this process, investors buy a property, clean it up real fast, and then putting it into MLS (Multiple Listing Service) back so you can sell it to end user or another investor
- Fixing and flipping. In this process, you remodel the property so you can add value to the purchased property and then put it to MLS back so an end user can buy it from you.
Which One?
No matter which method to choose, there is no right or wrong. But again, you need to consider your ability, capability, and commitment when doing this.
For instance, if you are thinking about doing a wholetailing, you will have to perform ‘the right buy’. It means that you can buy at price level that somewhat allows you to resell it below the market value, but you can still make a profit.
If you are thinking about doing the fix and flip, you need not only to do the right buy, but you also need to set the realistic budget for the renovation and remodeling – and stick to it. And most importantly, you want to make sure that you can do everything in a timely approach and manner. If the property is too long to sell, then these things may happen to you:
Interest Carry. You will have to deal with the monthly cost (from the borrowed money), provided that you have a loan for the property.
Opportunity Cost. This refers to the cost for being unable to take your (own) money so you can invest in another project. For instance, if the property doesn’t sell because it has too high price, you won’t be able to buy another (investment) property, missing out that promising opportunity.
Cost of capital. This refers to the costs that are charged by investors for themselves (for their invested money within the project). It’s also called as opportunity cost. This is the amount that is based on real estate return that you can get if you decide to invest elsewhere.
Final Words
Flipping and fixing is just one of the many ways to invest in real estate. But then again, it’s not for everyone. For those with passion in flipping houses, doing messy work, or decorating houses, flipping houses would be the most perfect option. However, there are still other options.
If you don’t really like doing the heavy lifting or the messy stuff, you can try other methods, such as real estate investment trusts (or known as REIT). In short, whatever real estate investment type that you want to do should go along with your passion and like, including the fix and flip concept.
