Flipping Real Estate

Flipping real estate simply means buying a property and reselling it quickly, as opposed to holding on to a property long term as a rental. Flipping comes in several varieties:

Buy, fix and flip. The most common form of flipping is the “fix ‘n flip.” This involves buying a property that needs work, fixing it up, then selling on the "retail" market, that is, to a person who will live in the house. This technique will require some time, effort and some money but the profit potential is also high. This method will require a good fundamental understanding of the local real estate market in order to make money.

The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you consider the cost of paying a real estate agent to sell the property.

Buy, refinance and lease option. Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money invested in the deal. Sell the property on a lease with option to buy.

The rent payment from your tenant/buyer should cover your mortgage payment. (If not, consider an interest-only or adjustable rate loan that is fixed for three years.)

When your tenant exercises his option, you reap a larger profit, since you don't have to pay a broker's fee. If the tenant exercises his option after twelve months, you benefit from a lower capital gains tax rate.

Buy and flip “as is.” If you don’t like to do fix-up work, consider selling the property "as is" as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market.

This is especially the case with houses in "transitioning" neighborhoods. Make sure, of course, that you acquire the property cheap enough that you can sell it below market quickly and still profit.

Wholesale. Because the fix and flip is very popular there are a lot of investors looking for rehabs. However, the investor may not have the time to research and hunt for the bargain property. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won't make nearly as much as the rehabber, but you will realize your profit quickly.

Pre-construction. In very hot real estate markets, prices are appreciating as much as 2 percent per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete.

If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true. You could end up losing money if the local economy tanks and you end up with a worthless condo that you can't sell for more than you paid. Use this approach very carefully .

Scouting. The scout is an information gatherer, so not technically a property flipper. He is the "bird dog" who finds potential deals and sells the information to other investors. Many people get started as a scout for other investors because it does not take any cash or prior knowledge to look for distressed properties.

The scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The scout can expect to make $500 to $1,000 each time he provides information that leads to a purchase by another investor.