Pros and cons of flipping properties
ConstecRealty - Miami MLS listings for condos and houses
Are you a real estate flipper or a keeper? Most home buyers are keepers, owning their houses and condos for five or more years. However, even as residential sales prices currently stagnate or plateau in most cities, according to the latest statistics from the National Association of Realtors and other sources, flippers continue to profit.
What is a real estate flipper? There is no official definition, but a real estate flipper is a buyer who acquires a property and holds title less than 12 months. Other names for property flippers are "quick turn specialists" and "speculators."
"Buy low, sell high" is the motto of flippers.
There's nothing wrong, illegal, immoral or fattening about that. However, buying low and selling high isn't always easy.
Real estate flippers usually must add value to earn profits. Not only do flippers buy 25 percent or more below the market value of equivalent property in good condition, but they increase the purchased property's desirability by improving it to increase the value more than the costs incurred.
Who should become a real estate flipper? Flipper properties are especially attractive to beginner real estate investors getting started. Having earned substantial profits from fast-flip properties, I am aware the profits don't always materialize as quickly as expected.
For this reason, especially for the first few properties, a "get rich slow" attitude is best. Later, after experience is gained, flipping properties becomes easier, perhaps even developing into a full-time profitable business.
Flippers are especially ideal for investors with a flare for spotting sound, well-located real estate in need of upgrading. When you see a run-down house and cry out "yuck," you are a potential property flipper.
Although any type of property can be flipped, most flippers specialize in houses because they offer the best potential and the largest market of prospective buyers. The secrets of profitable property flips include:
• Find a motivated seller who wants to sell due to an urgent reason and is willing to sell below market value in return for a quick sale. Strong seller motivations include out-of-town job transfers, unemployment, divorce, financial problems, illness, death in the family, and moving to a better house.
• Look for fix-up properties needing inexpensive cosmetic work. "El dumpo" houses often just need fresh paint, new light fixtures, cleaning and minor repairs, new carpets and flooring, and fresh landscaping.
Examples of unprofitable but necessary fix-up work to avoid include structural changes, new roof and foundation repairs, which are very expensive but add little or no market value.
• Search sources of "fast flip" properties, including real estate agents, newspaper classified ads, foreclosure sales, probate sales, bankruptcies, expired MLS (multiple listing service) listings, vacant rental houses, absentee out-of-town owner lists, and properties with unpaid property taxes.
• Drive around desirable neighborhoods looking for vacant, run-down or abandoned houses. Jot down the address, take a digital photo to remember the house, and then check the owner's mailing address at the tax collector's office to discover an owner who might be anxious to sell.
Flipper properties, even when they produce large profits, are not without possible disadvantages such as:
• Profits from the sale of investment properties held less than 12 months are taxed at ordinary income tax rates. However, when a flipper holds title more than 12 months, then the sales profits are taxed at the long-term capital gains tax rate, currently 15 percent or less, plus applicable state tax.
Of course, if you own and occupy the property as your principal residence more than 24 months within the last 60 months before selling, then your profit up to $250,000 (up to $500,000 for a qualified married couple) is completely tax-free. Home sellers who repeatedly sell their homes every 24 months are known as "serial home sellers."
• Some flippers don't enjoy the work of fixing up property to add market value. Serious flippers quickly learn do-it-yourself work wastes time and money. The smartest flippers hire professional contractors. However, obtaining cost estimates and supervising workers can be time consuming.
The goal of every property flipper is to add at least $2 of market value for each $1 spent on cosmetic improvements. Wise management can often orchestrate improvements on a typical house to completion within 30 and 60 days.
• Fast flippers who sell quickly after completing their added-value improvements forfeit long-term market value appreciation, which has averaged about 5 percent annually, according to the National Association of Realtors. In recent years, this annual appreciation was even greater.
Robert J. Bruss - Posted on Sun, Dec. 17, 2006