Things to Know When Flipping a House
Successfully flipping a house requires the following:
- Don't get emotionally attached to the property.
- Price everything ahead of time and allow a 20% cushion for unforeseen delays.
- Price the home to sell quickly and realize a profit.
- Do not upgrade beyond neighborhood standards.
Getting involved in Illegal house flipping by omission of documentation or willfully cutting corners and blatantly disregarding the laws in place can be very costly in the form of fines and law suits. First time house flippers should consider other costly scenarios before jumping into rehabilitating their first house.
What is the "as-is-value?" Most houses that need to be flipped are in dire straights and rehabilitating the property may cost more than the market will bear when the house is brought back to standards.
- Get real pricing numbers for work to be done. This includes a supply list, contractor and landscapers' fees and the cost of hauling away debris.
- How long can you carry the mortgage on the house?
- How many successful sales have taken place in the neighborhood over the past 12 months?
- What was the actual sale value of recently sold houses?
- What is the profit margin from the "as-is-value" to After Repair Value (ARP)?
Property insurance - Is the house insurable?
Some properties are uninsurable due to the perceived high-risk of an area or the fact that the house has been "black listed" by insurance companies in the past due to poor construction by the original builder or too many costly claims made on the property. Even though the house has been rehabilitated to perfection, the physical address will remain on the insurance company's database for an eternity.
A prospective home owner will most likely carry an FHA loan in order to purchase the home and meet FHA Mortgage requirements. Most bank loans require that the property be insured by a state licensed insurance company even if they are FHA loans. If the address is uninsurable, the newly rehabilitated house will be a total loss to the person(s) flipping the property.
Title - Who holds title to the property?
It is not unusual for banks to have sold the property many times over in a cycle of refinancing and making deals with various investors. Good and bad mortgages are sold in lots and finding out who really owns the property can be, in some cases, a nightmare. A proper title search must include a hard copy of who owns the property legally, how many liens are on the property, who else is named as the owner and if there are any quit claim deeds added to the title.
A title search at the local recorder's office will yield enough information on the property and its legal standing. Additionally, working with a title attorney and a reputable escrow company before investing in rehabilitating that first property will eliminate a lot of potential headaches and wasted money.