Flipping Houses for Profit - How Does it Work?

You've probably heard the old adage "if it sounds too good to be true, it probably is." While I'm not saying this is the case if you plan on buying a house and flipping it for profit, but it's something you want to look into before you delve into your checkbook to purchase something as large and expensive as a house!

If you buy a house at a cheap cost and resell it, it has potential to create a great income for you. It's the dream of a lot of people, as a "get rich quick" scheme. While it's not impossible, and several have accomplished it successfully, there's a lot of work in it, and it's not for the faint at heart.

To start off, you want to look for a good area. Pretty much everyone has heard the phrase, "location, location, location!" If you buy the best house in a bad neighborhood, you will not see the return you are hoping for.

You might have driven around and seen the signs on the side of the road that read, "We buy houses" or have read similar ads in the newspaper. These are seasoned investors with the proverbial "deep pocket." Many have certain criteria that your home must meet before they'll even consider purchasing your house.

There are two different ways to look for a house to flip. The first, and certainly easiest, would be to find someone who wants to sell for whatever reason and has equity in his or her home. Maybe they've decided to retire and move out of state, or have decided to downsize into a rental. You can purchase their home (if they are willing) at below market value, do a few upgrades and turn around and resell. Most homeowners though, do not want to go this route and will list with a Realtor to get the most money out of their home, so these people are few and far between.

The second, and most common way is to find people that are facing foreclosure. Unfortunately this has become the norm across the country as home values have decreased, and people have become unemployed or just can't pay the bills anymore. You want to look at market value, if the home you purchased were to be put on the market, what will you get out of it? A typical, seasoned investor will not consider less than a $30,000 profit. It will require substantial work for you, as well as the homeowner. What it would involve is negotiating a "short sale" with the current lender. A short sale is when more money is owed on the house than it's worth. You will have to prove to the lender the market value of the house, and base it on a comparison of what the loan pay off is. With the amount of bank owned properties currently, it has become a little easier to negotiate, but there are some lenders that absolutely will not negotiate with you in which it becomes a mute point. The owner of the home will have to request a "short sale" package, and fill it out with his or her financial information, showing they are unable to keep up with the payments on the house. If all goes well, and the short sale is approved, you will want to hire an attorney to do a proper title review to make sure there are no other liens on the property, and to perform a formal closing. With sometimes a few, but more often a lot, of repairs on the house, you can turn around and put it up for sale and hopefully make some money!

Keep in mind the cost of selling, which typically includes the Realtor's commission, preparing the deed, any inspections you might need such as smoke and carbon monoxide detectors, and here in Massachusetts, tax stamps will also be applied. Keep all this in mind when you're deciding how much equity there will be to "play around" with. You might find that you are just breaking even at the end of the whole ordeal, with nothing to show but a headache.

While it can be done, do your homework before you get started. You cannot only make a few dollars for yourself; you're also helping out a homeowner who might be facing foreclosure. While a short sale does show up on your credit, it is not as bad as having a foreclosure on it.