House Flipping Archives - Preferred Residential

New Approach to Flipping Houses

House flipping has a new business model: the model home. While it has been used almost exclusively by builders in new housing developments, the Baltimore Sun reports that real estate investors who buy, fix then sell distressed properties are beginning to incorporate model homes into their business plan.

At least three companies in Baltimore have decided that having a model home available for prospective buyers to walk through could have enough advantages to offset the cost of having to carry a finished home on their books for a year or more.

It is a sales model for house flipping that really hasn’t been tried before but appears to have advantages for both buyers and sellers. Most house flippers buy a house then fix it up hoping that buyers will like the choices they make. Having a model home allows buyers to get involved in the process and choose things like floor coverings, cabinets, counter tops and light fixtures. Buyers can also get a feel for the skills and quality of work they can expect from the seller instead of having to imagine what things might look like based on computer generated images. Buyers shouldn’t expect to save money on the purchase price but getting a house that is exactly the way they want it means they won’t have to spend money to change things after closing.

The Baltimore rehab companies in the linked story above are spending upwards of $400,000 on their model homes with the idea that the return on that investment will come in the form of faster sales and reduced carrying costs. It also should reassure potential buyers that they are not a fly-by-night rehab operation. Another benefit to the seller of having a model home is being able to eliminate the guesswork of trying to figure out what design elements will appeal to some buyer the seller hasn’t met yet. A model home could also create the opportunity for the seller to be able to pre-sell a home before rehab work has even begun.

This business model appears best suited for other large metropolitan areas where investors can find large numbers of similarly designed homes in need of repair. Would this work in Bend, Oregon? Maybe but in all likelihood the model house wouldn’t have the same (or even similar) layout as the house that was being sold and it might be on the other side of town. The other challenge would be finding enough houses to flip to create economies of scale. The companies in Baltimore plan on flipping 25 – 30 houses a year which is a number that could be tough to duplicate in Bend.

Foreclosures are Still a Big Part of the Real Estate Market

Foreclosure inventory rose in the first quarter of 2013 — Courtesy RealtyTrac

Foreclosed homes. Bank owned homes. Remember them? They aren’t talked about as much any more but they are still out there and they still have the ability to affect the real estate market.

Search for bank owned homes in Bend, OR

RealtyTrac’s first quarter analysis of foreclosure inventory shows that there are still 1.5 million properties actively in the foreclosure process or bank owned. For some historical perspective that is 9 percent more than there were at this time last year and about as many as there were in April 2008.

Many of these foreclosed homes are being bought up by institutional investors and turned into rentals. There is ample opportunity for individual real estate investors to do the same or even flip these foreclosed homes. The RealtyTrac report brings to light some points of information that could prove valuable to investors going forward.

In Oregon, more than half of all homes in the foreclosure process are vacant. These are homes that are not yet bank owned and could still be sold as short sales. While homes left vacant for a long time are more likely to need repairs this is not necessarily a bad thing for an investor. Whether the goal is to flip the house or turn it into a rental homes needing repairs often provide better returns because they sell at more steeply discounted prices yet once the repairs are complete these homes will rent for the same amount and/or sell for the same price as other homes not in foreclosure or short sale.

Shadow inventory rose 12 percent compared to the first quarter 2012. Homes that have started the foreclosure process but have not yet been listed in the market are considered shadow inventory. “Many of these properties will be listed for sale as short sales in the next six to 12 months, or go through the foreclosure process and eventually be listed for sale as bank owned in the next 12 to 18 months,” according to the report. This is good news for investors as it should provide more inventory of homes for sale thereby reducing competition. It should also provide homes selling or at least listed at a discount to the rest of the real estate market.

The number of old homes in foreclosure is rising. About a third of the foreclosure inventory as of the first quarter 2013 was built before 1960 which is 11 percent more than a year ago. Watch out for homes built before 1960. Regulations for everything were different back then and something as seemingly simple as the kind of paint or insulation used could add thousands of dollars to the ultimate cost of a home. Investors considering flipping or renting houses this old would be wise to pay for a professional inspection.

House Flipping: Anti-Flipping Rule Suspended Through 2014

The real estate investment strategy of flipping houses recently received good news in the form of the FHA continuing the suspension of their anti-flipping rule through December 2014.

The rule, originally enacted in 2003, was written to curb the practice of flipping houses by preventing the FHA from insuring mortgage loans on homes that were bought and then sold again within 90 days. The thinking was that there was a lot of “predatory” flipping happening often involving collusion with lenders and appraisers which was resulting in homes with artificially inflated values.

After the real estate bubble burst the FHA first suspended this rule in 2010 in an effort to reduce the excess inventory of homes, especially foreclosures. Many of those foreclosed homes were also in need of at least some level of rehabilitation which made them great candidates for flipping. Since the first suspension of the anti-flipping rule it has been extended three times including this most recent extension.

The FHA press release says, in part: “Through the regulatory waiver, FHA encourages investors that specialize in acquiring and renovating properties to renovate foreclosed and abandoned homes, with the objective of increasing the availability of affordable homes for first-time and other purchasers, helping to stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high. The waiver is applicable to all single family properties being resold within the 90-day period after prior acquisition, and is not limited to foreclosed properties.”

The obvious benefit of this continued suspension for flippers is access to buyers. By some estimates the FHA finances as much as 50 percent of all purchases made by first time home buyers. According to the National Association of Realtors® first time home buyers accounted for 39 percent of all home purchases in 2012. That is not an insignificant number of home buyers.

The other thing that is significant for investors is the potential to reduce carrying time and costs. The potential to reduce the amount of time a house is held can put thousands of dollars in the pocket of a real estate investor through reduced carrying expenses and by allowing them to possibly flip more houses in a given period of time.

Looking for a house to flip? Search Bend Oregon MLS

House Flipping: Get an Inspection

When house prices are rising flipping houses becomes more popular to investors. Lately at Preferred Residential we are seeing more real estate investors coming into the real estate market with the intent of flipping. House flipping is defined as buying and selling a property within a six month period.

There are some inherent dangers in flipping houses and one of those is not being exactly sure about what surprises might be lurking in the house you buy. Houses requiring unexpected repairs can throw a wrench in the timeline and the pocketbook leading to reduced profits or even losses.

A good way to avoid losing money is to have the home you are thinking about buying professionally inspected. Pay for a professional inspection? That is heresy to many investors who flip houses. Why pay $500 when “I know houses and if I waive the inspection contingency it will make my offer look much more attractive to the seller?”

The answer is: Because you don’t know everything about houses and even something as readily visible as stucco siding can ruin a flip. We just had buyers in a multiple offer situation NOT waive an inspection and boy are they thankful now. The inspection found some issues in the stucco siding which made the buyers ask more questions. After some research we found that the siding process used was extremely rare and three different siding contractors told the buyers they didn’t even know how to get it off the house.

Think of it from a return on investment perspective. A thorough inspection can save a person flipping houses thousands of dollars. It can mean the difference between a profitable flip and one that puts you out of the house flipping business.

New Approach to Flipping Houses

Foreclosures are Still a Big Part of the Real Estate Market

House Flipping: Anti-Flipping Rule Suspended Through 2014

House Flipping: Get an Inspection

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