Mistakes to avoid when flipping a home

There are pitfalls when purchasing a promising piece of property to flip—just ask the experience home flippers.  Huge rewards can be found by learning from others mistakes when beginning your home flipping venture.   The market is ripe with opportunities to make extra money when flipping with distressed property such as short sales and bank owned property often selling for 20-40 percent less then current market value.  However, it is important avoid the following pitfalls:

Don’t start flipping homes if your financial situation is not “healthy”.  Ensure that you have the following necessities in place prior to making your first flip:

1)      Full-time job or a steady stream of income

2)      A separate account with at least $10,000 set aside for repairs on your future flip

3)      6 months worth of living expenses in reserves

4)      Income which allows 10% of your monthly wage for savings or retirement

5)      Potential investment partner or partners

Don’t be without a business plan.  Create a personal financial budget, if you don’t already have one.  Next, create a businessfinancial plan that indicated the amount of capital set aside for repairing and remediating future properties that are purchased with the intent to flip. 
Don’t take on too many projects at once.  It is wise to begin the flipping process with just one home (unless you have a large backing).  Once your feet are wet with a successful flip then move on to the next. 

Don’t purchase a home “site unseen”.  Whether or not the home is in the most ideal area or the asking price is priced substantially lower than homes in the vicinity, never purchase a home without having a proper visual and structural inspection.  Flipping a home requires estimating the amount of capital it will take to repair any cosmetic or structural damage.  Purchasing site unseen is a gamble not worth taking!

Don’t purchase a home to flip if you are unable to carry the loan for an extended amount of time.  Ignore the urge to flip homes if you can’t afford 2 mortgage payments for an extended amount of time.

Don’t purchase a home with structural problems.  A leaky basement, water intrusion and large cracks in the foundation are an invitation to huge out-of-pocket expenses (along with other structural defects).  Carpet and paint is one thing—mold is another.  The goal is to pay as little as possible to spruce up the home for the next purchaser.

Don’t quit your day job (unless you have a lot of cash lying around).  You find THE home that is going to net you a years salary at your “real” job and think, “I should just quit and do this full time!”  Think it through.  You may net a year’s salary from one flip yet you may not be able to do it consistently.  Ensure that you have a knack for turning property at a significant profit prior to considering house flipping full time.

Don’t start without a solid exit strategy.   Good intentions unfortunately do not develop into dollars.  Have a plan if your flip doesn’t perform in that manner that you thought.

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ATTENTION INVESTORS!! New FHA rule change should encourage house-flipping

A new market will soon open to people who buy houses with the purpose of fixing them up and selling them: FHA buyers.

Since 2003, house flippers have been restricted from selling to buyers using Federal Housing Administration loans for 90 days after purchasing the property. That meant some flippers would shy away from deals with potential FHA buyers, knowing they’d have to wait for that 90-day period to end.

FHA loans often serve first-time and moderate-income homebuyers, enabling them to purchase a house with a low down payment.

The FHA said Jan. 18 that the 90-day restriction will be suspended for a year, beginning Feb. 1.

One result will likely be that more investors will jump into the flipping market, buying up foreclosed homes in disrepair and rehabilitating them for a profit.

Some say this will inflate housing prices, making homes less affordable for buyers. And some say this opens up FHA buyers to scams.

But the FHA says there are rules in place to prevent predatory practices. First of all, deals must be “arms-length:” The parties in the sale can’t have the same interest.  

This is designed in part to prevent homeowners from defaulting on a loan, then bringing in a friend to buy it from the bank at a rock-bottom price and return it to the homeowner at a slightly higher-than-rock-bottom price. In that scenario, the friend/flipper would make a profit and the homeowner would have a cheaper mortgage, all at the lender’s expense.

Another notable restriction prevents sellers from knocking the new price up more than 20 percent from its purchase price, unless an independent appraiser says the renovations justify that increase.

“They’ve seen enough of those abuses now over the past four to five years that they’re getting much better at identifying [predatory] transactions,” said Steve Cox, a branch manager at Boise-based Stonebrook Mortgage and president of the Idaho Association of Mortgage Brokers.

He said the rule’s suspension will help transactions move faster through the closing process, allowing more transactions to be final in time for the homebuyer tax credit, which is set to expire in June.

And he said renovating and selling houses is a “legitimate business activity, as long as they’re not turning around and making a substantial profit after beating up the bank for a low price.”

And since FHA loans have come to play an ever-more-important role in homebuying in the last two years, being allowed to sell to FHA buyers makes house flipping a lot more attractive.

**IBR