Okay, you know the drill: purchase a house below the current market rate, make some repairs and improvements to it, and then turn around and sell [flip] the house to generate big profits.
While the concept of flipping houses is nice, the reality is that so much more is involved in flipping real estate. Without the proper knowledge on how the process works, you could end up being saddled with a house you really do not want to own or end up taking a big loss on the sale of your property.
The real estate market has the potential to create huge profit windfalls for the savvy buyer. Here are a couple of tips to help increase your profit margin when flipping houses:
Buy low and sell high. How do you find homes to buy below the market?
1. Create a free brochure titled “3 ways to avoid foreclosure and get cash NOW for your equity”. Then, distribute your brochure to people who are currently in the foreclosure process and homeowners who are currently 90 to 120 days behind on their mortgage payments.
By the way, one of the helpful tips in your brochure should be to call you for a quick sale.
You can obtain foreclosure information from your local court house. For a list of homeowners who are currently behind on their mortgage payments you will need to contact a credit agency – Experian.com, Equifax.com, or TransUnion.com.
2. Contact divorce attorneys in your area. Offer your home buying service as a resource to help clients liquidate their homes quickly at a fair price.
Now, before you get into house flipping there are five main points you must take into consideration prior to closing on your deal:
Acquisition Costs
Every home will cost you money before the deal is even finalized. Plan on writing out checks to your attorney, to the title company, government agencies – such as recording fees, and an application fee for a mortgage [unless you are paying cash], and other closing costs.
Look into getting an option arm mortgage loan with a 1% minimum payment. This type of loan program can increase your cash flow by cutting your monthly payment in half!
These loans will also allow you to take a small piece of your equity and turn it into a tax deduction by creating deferred mortgage interest.
Management Costs
During the period you own the home you can expect to shell out cash for property taxes, utilities, lawn maintenance, homeowners insurance, mortgage payments, and more. The longer you keep the home, the more expenses you will incur.
Home Improvement Costs
Are you ripping out the kitchen? Laying new flooring? Putting in a new garden? Whatever repairs and improvements you make, are you certain that you can recoup these costs when you flip the house? Will the value of the house increase enough to cover your expenses?
Selling Costs
Once you are ready to sell the home, will you be selling it privately or through a realtor? Real estate commissions running as high as 6% can eat up your profits very quickly. In addition, you will need to pay an attorney to represent your interests and pay any other related expenses.
Capital Gains
A “good problem” to have is to make so much money off of flipping houses that you have to worry about paying capital gains taxes. You may avoid federal taxes, but your state or local government may assess a tax on you. Count on it especially if you live in a high tax area!
The “deal” you thought you made with the purchase of a house can quickly evaporate if the market turns cold or your expenses run too high. Carefully consider all five points before taking action and know your local real estate market inside and out.
Yes, people do make tidy profits by flipping houses, while others lose out. Do your homework before jumping in to make certain that you understand everything before buying a house that you plan on flipping later.