What could be a simpler way of making money than to sell a house soon after buying it for more than what you paid? That's the house flipping philosophy, and when the market is favorable for flippers -- meaning high demand for houses, little supply, and rising prices -- house flipping can be lucrative. But house flipping is risky because you can lose money if no one wants to buy your product. So what do you do if that happens?
What is a flip?
A flip is typically a house an investor buys, usually at auction, for a low price. Depending on the market, the flipper might pour money into renovating the house to sell for a profit and then do so. If the market is really strong, the flipper might sit on the house for a few months until they can sell it for a profit, without putting any money into the house. Either scenario would be a classic flip.
Is it a flip if it doesn't sell?
Property purchases typically need to sell somewhere between two months and a year after purchase to be considered a flip. So technically speaking, if you still haven't sold your property and it's been over a year, it isn't a flip anymore.
It is a flip in the sense that your intention was to sell quickly. More accurate would be to say that what you have on your hands is a failed flip. A failed flip isn't the end of the world; it just means you need a new plan. Here are some strategies to consider.
Plan B: Lower the asking price
Practically any house will sell at the right price. As a house flipper, you've presumably figured out how much you need to sell the house for to get the profit you counted on getting. But you can't always sell for what you want. You could try to lower your asking price, even if it means not making much money, breaking even, or losing money on the deal. Just chalk this up to a learning experience and figure out what went wrong before trying your next flip.
Plan C: Rent it out
If you can't sell for what you want now, you might be able to later. In the meantime, you might as well earn some money on the home by renting it out. You'll need to learn the landlord business, such as landlord-tenant law for your state, how to market the property, how to screen tenants, how much rent to charge, and whether you'll want to use a property manager. Then you'll get passive income until you're ready to sell.
Plan D: Offer a lease-option deal
A lease-option, also called a rent-to-own deal, is a combination of renting your flip and selling it: You'd rent the home to someone who wants to buy it in the future -- when they're mortgage-ready.
The way lease-option works, in a nutshell, is that you screen tenants and choose someone on the road to getting a mortgage soon. You would then structure the lease-option by charging rent plus an option fee, which gives the tenant the right to buy the home for a specified price within a certain time frame, typically three years. If the tenant can't buy after three years, you can extend the time or get another tenant.
Plan E: Live there yourself
Since this home was a flip, you probably already have a primary residence. Even so, if you don't want to lose money on the deal or become a landlord, you might want to sell your primary residence and live in the flip. When the market gets better, you can possibly sell for a profit, buy your dream home, and then start buying more investment properties.
The Millionacres bottom line
Although real estate investing can be a great way to make money, it's not a sure thing. Minimize your risk on a flip by buying for as low as possible: 65% to 70% of fair market value minus the anticipated cost of repairs; knowing the neighborhood you're buying in; and having a good plan in case Plan A doesn't work out.