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What you need to know about flipping a home

Flipping houses can be lucrative - but only if you know what you're doing.
6/19/2017 1:31:53 PM

If there's anything that shows like Property Brothers, Flip or Flop and Fixer Upper can teach the masses, it's that flipping homes is a quick and easy way to make big money.

Not so fast.

Flipping houses can be lucrative - but only if you know what you're doing. Choosing the right home, in the right location, making the right changes and finding the right buyer are all key steps in making your house-flipping adventure a profitable one.

Housing shortage reveals opportunity

As prospective homebuyers flock to open houses this summer, many are finding that limited options and a plethora of competitors are holding them back in two ways. First, there aren't enough homes to go around. And second, the more people determined to make a purchase, the higher the price of a home.

But where some see a problem, others see an opportunity. The real estate industry is seeing an uptick in home flipping, which Trulia defines as the buying and selling of a home within the same 12-month period. According to the real estate data website, 6.1% of all homes sold in the U.S. in 2016 were flips, marking the first time in several years that the percentage of flips increased. Though this isn't as high as it was in home flipping's heyday - the early 2000s, at times, saw more than 8% of homes flipped - the change in trends is notable.

If the home flipping fad is calling to you, and you're already scouring real estate websites for homes to invest in, it's important that you know how to navigate the complicated world of quickly fixing up a home and reselling it. Before you take out a residential mortgage for a home investment, be sure to do your homework.

Choose a lucrative location

First, you'll need to find a home in a good location. Choose a neighborhood where other homes are selling for a decent profit and are well-maintained. Buying a home in a run-down neighborhood that shows no signs of immediate improvement likely won't attract the buyer you're hoping for.

According to WalletHub, some of the best cities to flip homes in, based on market potential, quality of life and cost of renovations, include:

  • Sioux Falls, South Dakota.
  • Fort Wayne, Indiana.
  • El Paso, Texas.
  • Oklahoma City, Oklahoma.

It takes more than market potential for a city to be right for flipping. If there are too many investors buying up fixer-upper homes, the market can become saturated. Newcomers may find that the success experienced by those that were there first isn't as easily won as it once was.

According to Trulia, home flippers are most active in these cities:

  • Las Vegas, Nevada, where 10.5% of homes sold in 2016 were flips.
  • Daytona Beach, Florida, where 9% of homes sold in 2016 were flips.
  • Tampa, Florida, where 8.4% of homes sold in 2016 were flips.
  • Memphis, Tennessee, where 8.2% of homes sold in 2016 were flips.

Make the right renovations

In the early 2000s, it was common for investors to make a home purchase and resell it as is when the market pushed prices higher. This is not a common practice among today's flippers, according to CNBC. Rather, investors are working to make their homes more valuable for the next buyer.

"We looked at the share of flips that actually had work done to them using building permit records and that is also near an all-time high," Ralph McLaughlin, chief economist at Trulia, told CNBC.

Successful home improvement relies on three things: Making the right changes, careful scheduling and intentional budgeting.

"If your drywall person is tripping over your floor person, which is preventing the plumbing person from coming in, that can add a lot of delays and costs to you," McLaughlin explained.

According to Bob Vila, it's important to only make changes that add value to the home and make sense for the neighborhood.

"They get into these properties, fall in love with them, and think it would be great to put a hot tub in the bathroom of a $125,000 house," Vena Jones-Cox, a real estate investor in Cincinnati, told Bob Vila. "They're not reasonable about what should be done, go way overboard, and never get their investment back."

Some home improvement areas that nearly all houses benefit from include:

  • The home's exterior.
  • The kitchen.
  • The bathroom.
  • The front yard.
  • The entryway.

Remember: First impressions are everything. Make sure the first thing your future buyers see is a beautiful home.

Investors hoping to revamp a home for resale may consider using a renovation loan to help finance some important changes. Options like Fannie Mae's HomeStyle loan and the FHA 203(k) loan make it simple for homeowners to upgrade a house. The HomeStyle loan allows borrowers to make structural changes to the home as well as various repairs. The FHA 203(k) loan comes in two versions: limited and full. The limited loan is great for a home that has some minor changes to be made, but no structural flaws need to be addressed. The FHA 203(k) full loan allows for structural changes as well as minor repairs. The minimum dollar amount for this loan is $5,000, so it's ideal for the home that requires one or two bigger projects before it can be flipped.

Flipping a home take a lot of hard work. Before you dive into an investment of this size, be sure to research the neighborhood and available contractors. Carefully lay out your budget, and be sure to give yourself some wiggle room; unexpected surprises can quickly break a budget and set back a schedule. With the right home purchase and upgrades, you may find success in flipping homes.

Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.