One key to success in the fix-and-flip business -- buying a fixer-upper house, renovating it, and selling it for profit -- is timing the real estate market correctly. It's also beneficial to know something about construction or have a reliable general contractor and/or a construction crew on your team. Fix and flip can be a lucrative, exciting business, but it's not as foolproof and glamorous as what you might have seen on TV. We'll discuss what fix and flip is and how you can be successful.
What is fix and flip?
A fix and flip is a type of real estate business model where a real estate investor buys an investment property with the intent of selling it for a higher price than what was paid. The goal is for the sale (and subsequent profit) to happen as quickly as possible.
The quick timeline is what makes the fix-and-flip business different from a similar real estate investment strategy called "buy and hold," where the investor buys property with the intent of renting it out indefinitely or holding it for several years until the market becomes more favorable for a sale.
Repairs and renovations
Usually, a fix and flip requires repairs and renovations before the property can be resold for a profit. But in a real estate market where prices are rising quickly and demand for housing is great, the fix-and-flip investor can often make a profit just by waiting a short time and reselling, without putting any additional money in -- turning a profit just by buying before prices rise. This is the epitome of timing the market correctly.
What usually happens with a fix and flip, though, is the investor needs to put in money for repairs and renovations in addition to the money spent to acquire the property. The goal is to bring the house up to standards comparable to neighboring homes so that the investor can fetch top dollar for the property.
Why fix and flip is so popular
The fix-and-flip phenomenon has been popularized by various reality TV shows, starting with Flip This House in 2005. There were more: Flip or Flop, Flipping Out, Flipping Boston, Masters of Flip, Beach Flip, and more. The shows have been hugely popular, which is why there are so many of them, including various spinoffs from the original.
The TV shows brought awareness to the business, and they often make the business of fix and flip sound lucrative. But this has been a mixed bag for real estate investors. The awareness opened a new world of investing opportunities for many people. But the bad side is TV shows often give a skewed view of the process, making it seem easier and more profitable than what could really be the case.
The land mines
Fix and flip, while it can be a profitable business for real estate investors, can also be a losing proposition if the investor makes poor or uninformed choices. Two big ways investors can get in trouble with a fix and flip are not timing the market correctly and not adequately assessing the amount of money it'll take to repair and/or renovate the house.
The best way for a house flipper to make money would be to buy just before house prices start to rise and while there's demand for houses in the area, otherwise known as a seller's market. That way, it would be possible to sell for a profit while doing little or nothing to improve the house.
If the investor buys during a balanced market, they can still make money, but they will probably need to buy a distressed property, often a foreclosure, and then get it back in shape. To do this, the investor needs to know what needs to be done to the home and how much it will cost. Not correctly analyzing the scope and cost of work to be completed can make the difference in making money, breaking even, or losing money on the flip.
If the investor buys at the top of the market, when prices are highest and demand for houses is waning, or during a buyer's market where buyers, not sellers, call the shots, they might never make a profit on the home.
Assessing a home
Unless a real estate investor is also in construction or a related business, they should probably hire someone to evaluate the property before purchase. Some houses require extensive repairs to make the house sellable, and that might make what appears to be a good deal a bad deal overall. A professional can help an investor assess each property before purchase.
Financing a house flip
Investors in the fix-and-flip business usually buy properties using cash. If they don't have cash, they often get a flip loan or a hard money loan from a hard money lender. These lenders specialize in lending money to house flippers for a short term (a bridge loan), often a year, figuring that when the house sells, they'll be paid back. If the house doesn't sell by the time the loan is due, the investor usually needs to get another loan, often from a traditional lender, to pay back the hard money lender.
Part of being successful flipping houses is finding houses to buy. That part isn't always as easy as it sounds. The investor needs to figure out how much they can spend on a property to make a profit (acquiring and renovating it), choose a good market, hire a real estate agent or send out mailers to potential sellers, analyze the deal, make an offer, and negotiate a good price. Some investors hire a wholesaler to do those parts of the process.
Real estate investors who want to use a wholesaler usually get on a wholesaler's list, and when a wholesaler snags a deal, they contact investors they know. Wholesalers usually earn about $5,000 for the service, sometimes more, but the cost could be worthwhile if it means the investor gets a good property.
House flipping seminars
A dark side of the fix-and-flip business are house-flipping seminars that have sprung up across America, largely because of the interest in the business, partly due to reality shows. The takeaway regarding house flipping seminars is that it can be possible for investors to learn something from them, but the real reason for most of these seminars is to get attendees to spend what often amounts to large sums of money on classes and coaching -- money that could have been invested in a flip.
The Millionacres bottom line
Fix and flip can be a lucrative business. Real estate investors should learn all the steps involved to become an experienced investor: assessing the real estate market, finding a suitable property, negotiating a good deal, obtaining financing, working with contractors, and selling the property. It takes work to conduct a fix and flip correctly, but if you put in the work, fix and flip can be a rewarding experience.