More ArticlesDoes Flipping a House in This Market Make Sense?
One Newport News Investor's Experience
By: Cheri Nice
As a real estate professional, I am frequently asked this question and the answer is: Without at doubt! Let me explain why.
You can reasonably expect an annualized return of 20-30% on your money!
In real estate, like in all investments, the idea is to buy low and sell high.
With the abundance of foreclosures, there are many opportunities to buy low but, what about selling high? Listening to the news, I am reminded of Chicken Little shouting, “The sky is falling! The sky is falling!” when he is hit with an acorn. If the media was your only source of information on the real estate market you might believe them. Taking a more educated look at the market, you soon realize that the news is over reacting in just the same manner as Chicken Little did. They are taking a little bit of information and generalizing it to the entire market. For those of you too young to know about Chicken Little - Go to http://devilpenguinfyp.wordpress.com/tag/the-sky-is-falling/
First, in the Hampton Roads area as well as other areas in the US, some segments of the market are still doing well. The average sales price in this market is $225,000. In 2010, in Hampton and Newport News, as an example, 2062 single family dwellings were sold for under $225,000. That is 2062 opportunities to make an annualized 20-30% on a house that you have bought to flip.
There are a couple key rules to follow when you decide to flip a house. These will sound simplistic but stay with me I will explain.
1. Buy the right house.
2. Pay the right price.
3. Correct the defects.
4. Sell it fast.
Buy the right house
The house you buy to flip must be what is selling. If I can generalize for a moment, it is a 3+ bedroom detached single family house with 2 full baths in a nice neighborhood that you can price under 200K after you have make your renovations. The specific definition of the right house varies by neighborhood and target buyer. So knowing the area that you are considering is important. A realtor that specializes in real estate investment can help you gain that knowledge if you do not have it.
Pay the right price
What is the right price to pay for a property? It is the price that will provide you with your desired rate of return. To determine this you must know 5 pieces of information:
- What is your desired rate of return or desired profit?
- What price can you get for your renovated property?
- What are your renovation, holding, and sales costs?
With the five pieces of information above, the right purchase price is a calculated with the following formula: Purchase Price = Sales Price minus rehab cost, holding cost, cost of sales and desired profit.
Correct the Defects
On some houses, the only defect is paint and carpet. On most, there is usually more to do. By knowing your target market, you will know what they are looking for and what to correct. This is where a seasoned investment coach can be invaluable.
Let me give you some examples from the first house I flipped:
Defects:
1. Strong urine smell from animals
2. House was dark – lots of cheap dark brown paneling
3. No updates have been made in last 20 years
4. Huge ugly kitchen bar took up about ½ of the living space
5. Garage was half converted
6. Several windows were fogged
Corrections:
- Clean, treat with OUT and paint plywood with shellac
- Remove paneling – install sheetrock, paint with light color
- Replace kitchen and bathroom cabinets and counter tops
- Removed bar, replaced with ½ wall
- Finished garage& made it living space
- Replaced fogged glass
Sell Fast
The mistake that many first time real estate investors make is to try to eke out the very last cent of profit from an investment. The time to be pennywise is when you are renovating, not at the time of sale. The best approach, now that the work is done, is to sell it as fast as possible. I believe that you should price your rehabbed home at a price that would guarantee that the house will sell within the next two or three sales in the neighborhood.
