House flipping can be a great way to make a quick profit with fairly minimal risk. In fact, it is so popular that research has shown that the number of house flips in the United States has steadily increased over the last few years, although some areas of the country have a higher flipping rate than others. In order for a property purchase to qualify as a flip, the property must be bought with the intention of reselling it very quickly.

There are two different types of house flipping. These are:

- The investor buys a property in a market with rapidly rising home values. They don’t make any repairs or updates, but simply hold onto the property for a few months, then resell it at a higher price in order to make a profit.

- The investor buys a property that requires some light to moderate repairs and updates. They carry out the work themselves or hire someone to do it for them, then they sell the property at a significantly higher price in order to make a profit.

Property flipping may sound simple, but there are certain things that you need to be aware of if you are to be successful. Here are the five things that you need to know about flipping houses.

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1.    Be wary of bank foreclosures

On paper, investing in a foreclosure property can seem like a no-brainer. These properties, which have been repossessed by the bank, are typically neglected and in need of some TLC to bring them up to standard. And since banks are keen to sell them to recoup the money that is owed to them, you could be in line to get a bargain. However, whilst regular seller-to-buyer transactions carry a legal requirement for the seller to disclose any known problems, this isn’t the case with banks. In some instances, you may not even have a chance to view the property before you make an offer. This ramps up the risk of your investment significantly.

If you are a new investor, we would definitely recommend avoiding purchasing a foreclosure for your first flip and stick to finding properties through other sources. If you do want to pursue a foreclosure because the deal is too good to turn down, try and do as many inspections of the property as you can before you commit.

 

2.    Be prepared for hidden costs

Unless you are an experienced property flipper, chances are that you may not be aware of the many hidden costs that are associated with this transaction and failing to account for them could massively eat into your profit from the sale. Some of the hidden costs that you need to be aware of can include:
 

- 5% to 6% of the sale price of your flipped home to the real estate agents managing the transaction.

- Capital gains tax at your regular income tax rate rather than the capped 20% rate (for homes owned for less than a year).

- Unexpected work that needs to be done on the property before the sale. A contingency fund that is built into the profit margin for the flip is always a very good idea.

The best way to avoid any unexpected hidden costs is to be extra careful with your sums and create a financial plan that accounts for these within your overall profits.

 

3.    Be savvy about government regulations

Whilst there is nothing illegal in making money in flipping houses, there are very stringent regulations that have come in to control the process. The Federal Housing Administration (FDA) requires that you own a home for 90 days before you can sell to a buyer who is using an FHA loan. Similarly, if you sell your investment property for more than twice what you paid for it, the FHA will need to see two appraisals of your home and you are responsible for covering the costs of these.

 

4.    Weather woes and season slumps

This issue is particularly applicable if your new home needs a considerable amount of renovations since there are certain tasks that you simply can’t do if the weather isn’t in your favor. For example, tiling a roof, laying concrete, painting the outside of your property or landscaping the garden. It is important to factor changeable weather into your plans if you are buying a property in a location that is likely to be affected.

The seasons are also something to keep in mind, particularly since certain times of the year are more successful than others when it comes to selling a home. Spring and summer are considered the most favorable times of the year to sell since the nicer weather makes viewing properties a more pleasurable experience, homes tend to appear in their best light and buyers are more amenable to moving all of their possessions when they don’t have to contend with poor weather conditions.

 

5.    Theft

Unfortunately, building grounds and construction projects are often tempting targets for thieves who may try to take materials, tools and other things that may be laying around. Securing your property properly is very important to minimize this. Be sure to change the locks as soon as you gain ownership, as you don’t know who may still hold keys to it. Be sure not to leave anything valuable lying around in plain sight and check your contractors thoroughly to ensure that they have a clean record before you hire them.

These are five of the most important things to bear in mind if you are to be a successful property flipper. For more advice, please speak to Washington Equity & Funding Corp expert team.

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