It sounds GREAT on the surface. Buy a home in need of some “fixing”… be it major repairs or just cosmetic items. Make all of the repairs and put it back on the market with the hope of making a profit. Well…let’s talk about the potential pitfalls…and windfalls of the fix and flip investor.
First, when buying one of these properties, the road to success starts with determining the after repair sales price…and work back from there.
An investor must have knowledge of costs including: repair costs,closing costs, loan fees, homeowner’s insurance, title fees, taxes, utilities, holding costs, etc. Typically the costs can be divided into four categories: improvement costs, buying costs, carrying costs and selling costs.
SO…next you must consider your potential profit. What would you have to put in YOUR POCKET to make it worth it?
Here is an example:
You find a home you feel would be worth $200,000 when it ready to sell after repairs and cosmetic fix-ups. You figure $3,000 in buying costs, $10,000 in repair costs, $2,500 in carrying costs and $10,000 in closing costs and sales commissions when you sell. It’s also almost a given for investors to add in a buffer for unexpected costs. Let’s estimate that at $2,000. AND, you are willing to do this project for a profit of $12,000.
When you take the potential sales price LESS costs you have $160,500. You must make that the absolute bottom line. Offer less and know you will walk away if you have to pay over the $160,500. THE END. There is NO ROOM for emotional attachment in the game of fix and flip.
Clearly, the numbers I am quoting are only for demonstration purposes. Each house will be different. You might SCORE with a home that only needs some new carpet and fresh paint. Or, you might be surprised (and not pleasantly so) to find the AC unit that worked when you purchased the home is really on it’s last legs and you have an additional $6,000 worth of costs.
In any case…there is A LOT of opportunity in our market for some great deals…as long as you do your homework and buy at the right price in the first place.
Another thing you MUST know is along with all of the mortgage reform laws came some rules from FHA regarding the end purchase of a fix and flip house.
According to Gina Chavez with Cherry Creek Lending…here’s the scoop:
FHA’s property flip waiver, which allows buyers to purchase a property being flipped in less than 90 days, took effect February 2010 and was to expire January 31st, 2011. On January 29th, 2011 FHA announced an extension to the waiver through December 31st 2011.
To ensure FHA borrowers are protected from inflated prices, the waiver has specific requirements which must be met:
* All transactions must be arms-length, with no identity interest between the buyer and seller or other parties participating in the sales transaction
* If the sales price of the property is 20 percent or more above the seller’s acquisition cost, the lender must meet 2 specific conditions:
1. Justify the increase in value by obtaining a second appraisal (the buyer can not pay for the second appraisal; this is a seller paid cost. We require the appraisal to be paid at the time the appraisal is ordered. The cost for the second appraisal is $470)and
2. Obtain and review the property inspection (underwriting may call for repairs from the property inspection if they pose a health and safety risk or are required to be repaired to comply with FHA guidelines)
* Seller must hold title to property
* No previous flipping activity exists for the subject property within the preceding 12 months
* Property must have been marketed openly and fairly via MLS, auction, for sale by owner or developer
As you can see…there are a lot of things to know if you are going to be in “the game”. Make sure you have a reliable team of professionals to help support you throughout the process.
As always… if you are looking for a GREAT agent to help with your real estate needs please e-mail me at Adele@GreaterPhoenixHomes.com or give me a call (or text) at 602-504-3898 or 888-897-7821 x 114. Plus, I have a GREAT search tool on my web site that gives you the ability to search the entire MLS…just like agents do. Very COOL! Go to Metro Phoenix Homes and check it out! YOU can create and save as many searches as you would like…and it is THE SAME SEARCH I DO AS AN AGENT! You will LOVE it!
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