If you're looking to make money in the real estate market, flipping houses is a good way to do it. But one challenge many house flippers encounter is finding the right homes to fix up for a profit. If you're convinced that your next real estate investment should involve flipping houses, here's how to locate distressed properties worth sinking money into.
What's the best way to find houses to flip?
Flipping houses is fairly easy when you know what you're doing; it's finding homes to flip that's often the tough part, so here's how to tackle it.
Narrow down a market
Landing on a target real estate market will help you narrow down your choices for flipping houses. Specifically, it could pay to focus on neighborhoods that are up and coming, but not yet the most desirable. That way, you're likely to spend less money on a home's purchase price and property taxes while you own it.
At the same time, though, it pays to choose a neighborhood that can attract buyers in search of a good deal. That means picking a neighborhood with decent amenities, like access to public transportation, good schools, parks, libraries, shopping, and local businesses. A neighborhood with a relatively low crime rate is also a good one to focus on.
Look at auctions
Homes that are put up for auction are those that have been foreclosed upon. The benefit of buying homes at auction is that you can generally get away with paying less money for them. The downside? You'll usually need to come up with that money in cash form, as auction homes generally aren't financed via a mortgage. If you don't have the money to buy one of these homes outright, you may need to resort to a hard money loan or find a real estate investing partner to put up that capital.
Another thing: Homes sold at auction are often snatched up on the spot, which means you may not have time to look at the property before buying it. As such, your renovation costs may be higher than you're planning on, thereby hurting your chances of turning a profit.
Find REO properties
Foreclosed homes that don't manage to sell at auction become REO properties, or real estate owned properties. In other words, ownership of these properties reverts to a bank or financial institution, which offers a real estate investor like you the chance to score a home on the cheap.
The reason? Banks are in the business of lending, not owning homes, so they're generally eager to unload them as quickly as possible. Keep in mind, however, that some banks like to sell their REO properties to real estate investors in batches. As an individual investor, you may have a hard time finding a single home this way.
Also, as is the case with foreclosures sold at auction, with an REO property, you could wind up with a home in disarray. If your renovations are more extensive than anticipated, that will eat into your profit.
Consider short sales
A short sale comes about when an owner walks away from a home at a time when its value isn't enough to pay off the mortgage attached to it, and the lender is short the difference. The upside of a short sale is that you'll generally save money by purchasing a home for less than what the typical property in that neighborhood goes for. On the other hand, short-sale homes can be notoriously neglected, so your house-flipping costs could end up being more substantial than you'd think.
Enlist the help of a real estate agent
A real estate agent who specializes in flipping houses can help you pinpoint your choices and help you find the right investment. For one thing, a real estate agent who knows the local market can lead you to corners of it where homes may be undervalued, thereby giving you a good opportunity to make a profit. A real estate agent can also search the multiple listing service (MLS) to find homes that are listed as short sales or REO properties.
What should you avoid when looking for houses to flip?
The purpose of flipping houses is to make money. But the more you spend on renovation costs, the less you'll profit. That's why it's important to draw the line between issues with a home that are relatively easy to fix and those that are too costly and time-consuming for comfort. Remember, too, that the longer it takes to get a home move-in ready, the more money you, as an investor, tie up, and the more risk you take on. With that in mind, here are some potential deal-breakers to keep on your radar when seeking out homes to flip:
- Structural issues: A crack in a home's foundation can be an extremely expensive repair to tackle, and chances are, it's not something you can do yourself.
- Outdated electrical systems: Wiring that isn't up to code can be a nightmare to address. Not only will you generally need an expert electrician, but you'll also need permits to do that work, which could delay the renovation process.
- Widespread mold: A small patch of mold under a bathroom sink is no big deal. Widespread mold throughout the property is a different story, as it can be costly and difficult to mitigate.
- Faulty plumbing: A home that's ridden with water damage is a home you probably don't want to touch. Not only will you bear the costs of repairing that damage, but you'll also need to address the underlying issue, which could mean running new piping throughout the home -- and paying a lot of money to do so.
- Tiny kitchens: An outdated kitchen isn't necessarily a deal-breaker when flipping houses, but a tiny kitchen is. If there's no room to expand that kitchen, or to do so cost-effectively, then you're better off passing.
- An inadequate number of bathrooms: A 1,500-square-foot, two-bedroom home with one and a half bathrooms is a reasonable buy for an investor looking to flip a house. But if you're looking at a property with 2,500 square feet and four bedrooms, one and a half bathrooms won't cut it. Even if you fix those bathrooms up, that home is still going to be a hard sell.
The bottom line
Generally speaking, you're better off focusing your efforts on homes that are in bad shape cosmetically but are structurally sound and don't have any major wiring or plumbing issues. It's easy enough to redo a kitchen or update some bathrooms, but tearing down walls to address mold damage or ripping through walls to re-pipe can be a logistical and financial nightmare.
Your success as a real estate investor could hinge on finding the right homes to flip. Follow these tips in your search for the right investment, and with any luck, you'll be pleased with the profit you walk away with.