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The Math of Flipping Houses

-- Posted: August 22,2007 | Brad Levinton

As the credit crunch encircles some segments of the housing market, it has created some opportunities in and for others. Many home owners who bought over the last few years took on creative mortgage products that should not have been offered to them. This is evidenced by the recent inundation of listings on the local market and the nationwide rash of recent foreclosures. Surely you've heard about it on the news. Just to clear the air though, the foreclosure rate is not that much higher than in years past. It has just been extremely sensationalized by the media.

All this mess is very unfortunate, but it creates a wealth of opportunities for investors looking for either flip properties or rental units. The ability to buy properties at below (sometimes way below) value exists at certain price points. Now whether these properties are intended to be your dream home, investment properties, or a flip project, the choice is yours. If the home is to be your primary residence or you intend to lease it out as a rental property, you should be in a better position on equity as the years roll on by.

If you are buying a home to fix it up and flip (to buy, repair and then sell), there are some steps you need to take to protect your investment as well as your profit. For the record, a conventional lender is not in the business of financing your flip home over thirty years. Loans intended for flip properties are usually made at higher rates and require more of a down payment; after all, lenders don't want to take losses up front for making a loan in which the buyer will simply turn around and flip it shortly there after. You may have to obtain financing through a conventional bank at a higher rate and stiffer terms. If you plan on fixing it up and then renting it for a few years prior to reselling it than there are no issues.

In the case of flipping you will need to keep every invoice, receipt and proof of payment that was made to improve the property. On short term turnarounds, your buyers lender will want documented proof, including costs of the improvements that were made to the home. Yes, there is still a lot of room to make a profit, but lenders don't want investors buying homes, slapping a fresh coat of paint on the house, and then turning around and selling the home for $20,000 more than they bought it for just months earlier. There must be a paper trail for all improvements made to the home. Document everything and everything will move smoothly!

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