How the Current Real Estate Slump Affects House Flippers

Real estate is in sad condition around the nation, save for a few hot spots still thriving. If you are a small or new house flipper, this real estate slump may have some interesting or downright scary affects on you.

For those who have been flipping and have homes in inventory-waiting for buyers-your wait may be extended. For those who are in the process of flipping their first home, you may find yourself in a money bind, if you are not careful about costs and realistic about pricing. For those looking for their first or next flip, you may be faced with funding difficulties. Read on for some practical advice from a house a month flipper.

Existing Small Flippers

If you are flipping your second or third house and have been overjoyed with past results, you may find yourself faced with some hard choices. The funding you have and how long you can hold out for your price will determine your actions. Lenders are becoming tight with their lending practices and are closely scrutinizing the price for which you purchased against the sales price. One large lender (particularly badly hit by defaulted mortgages) refused to approve a mortgage for a qualified buyer, because they said there was too much of a chasm between the flipper's purchase price and the new sales price. Despite the fact that the flipper was able to show how much had been improved on the house, the lender refused to budge and the sale fell through.

If you have "deep pockets," you can just sit and wait for a buyer. If you don't, you may need to do some price or funding negotiations to get a buyer qualified. Drop the price, take back a second mortgage (if the lender will allow it), go for a lease purchase, get creative. If this property stays empty for too long, consider renting it. Empty properties are at risk the longer they stay empty. Ask any big builder who has inventory standing empty, if they have security on-site. They probably do, to protect the integrity of the property. There are groups who can strip an entire house of fixtures, air and heating units, copper pipe and wiring in a single night. We have seen it happen and we check properties regularly. An event such as this can cost you thousands of dollars in materials and labor, not only because of what was taken, because of the damage caused in the process of taking. If you rent, you may have to do some cleaning, painting or carpet replacement after your renters leave. However, that is a small cost compared to a major loss and you are receiving rent money to offset your monthly payment. This will help extend the time you have to sell the house.

First Time House Flippers

Here you are, waist deep in your first flip. The real estate economy sucks; there are three houses in foreclosure or for sale on the same street as your flip. You want to put your flip on the market in two weeks. You are worried about getting a buyer (or you are still foolishly thinking that the marble kitchen counter top that busted your budget is all it will take for the first potential buyer to sign on the dotted line). Take a deep breath, sit down with your calculator and determine your breakeven point for the house. You must know, up front, the lowest price you can accept for your flip. Now determine how long you can keep making the monthly payment without falling behind. Seeing this in black and white will give you a picture of reality. You must know the dollars and cents before you put up the for sale sign.

In a buyer's market, which this is, your house must stand out from all others in appearance, price and perks. If you decided not to paint or clean the outside of the house, give it some serious consideration. If all you did was mow the lawn, go back and make it immaculate-remove all trash, edge the drive and walkway, weed the gardens, plant a flower near the entry door and keep it watered (in a drought area, buy a realistic looking seasonal silk plant-no plastic). Make the windows sparkle, be sure your for sale sign is straight and professional looking. Put air fresheners in the house-cookies or spice, no flowers-they can be purchased for about a dollar and how it smells when people come in can turn them on or off right away. Are you done yet? A good way to check the curb appeal of your flip is to ask someone who has not seen it to drive down the street where it is located-before you put out your sign. Ask them to tell you which houses on that street caught their attention as "nice." If your flip wasn't one of the houses they picked, take them there and have them point out the flaws.

Offer perks to the buyer and/or to the real estate agent. A refrigerator (doesn't have to be new, but operable and clean), a television, a DVD player, an I Pod, a weekend for two at a local hotel or resort-these are all things that could sway a buyer in your direction. Real estate agents usually want to see money. You can offer a bonus to the agent who brings the buyer within a certain time period, 30, 60 or 90 days (base this time period and bonus offer on your dollars analysis from above).

Looking For The First Flip (Or Another Flip)

Wow! Look at all those houses for sale out there. We're in flipper heaven, right? Yes and no. If you have your own money or special funding and don't have to look for the dollars, you are sitting in the catbird seat. If you don't, lenders may be reluctant to fund you, even with good credit. If you will be going out to look for money, take as much "ammunition" with you as you can find. Know how much you will pay, estimate real estate, closing, tax and insurance costs, as well as renovation costs. Have a written budget. An easy way to come up with renovation material costs is to make a list of everything you think you will need. Then take your list to the local building supply store and ask them to work up a quote for the materials. Since you are a potential buyer, they will usually accommodate you. If the store has a contractors' sales department, go there for your quote. Get letters of reference from people who know you and your work ethic. Bring pictures of your work or previous flip. Have a cosigner standing by-just in case.

While you are out looking for that flip, don't let dollar signs get in your eyes. Price is not everything when it comes to buying a flip. The lower the price, generally, the worse the condition of the house. What you want to find is a low priced house that has minimal repair requirements. The less you have to spend, the more you make and the less you have to do, the faster you can put the house back on the market. Don't forget to look at the neighborhood. Is the neighborhood stable, i.e., few homes for sale in the area, or is the neighborhood in distress, i.e., many homes for sale or in foreclosure? Your flip should be in a stable neighborhood.

Conclusion

Yes, there is a real estate slump and, yes, it has some negative affects on house flippers. However, on the bright side, there are now plenty of potential flips on the market. In addition, lenders who are carrying particularly bad homes (i.e., in great disrepair), on their books, are likely to be very negotiable on the price just to be rid of it-because they have so many defaults. If you have the know-how, you can pick up some super deals. To all flippers, bid low, spend wisely, price reasonable and keep your head in the game, because "this too shall pass."

Note: Check Out These Other Helpful Articles

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