The real estate market has recovered from the housing crisis of the late 2000s (although we do not yet know how the economic downturn from COVID will affect the housing market). Still, with the housing market appearing somewhat stable, people are starting to look for new ways to make money when it comes to buying and selling property.
One way that has long helped some investors to make money, is through the process of flipping houses. When property is flipped, the buyer, who may just be a person in a single transaction or a large-scale investor, buys property—presumably for less than market value—and then (quickly) resells the property at or more than its market value. The immediate buy and sell is where the “flipping” term comes from.
As you can imagine, because the profit comes in buying low and flipping (selling) high, this was very popular during the housing crisis, when foreclosed properties could often be purchased at a favorable price.
Be Wary of Pitfalls
Making money is not easy. One study revealed that 12% of property flipped did not make any profit at all, and even saw a loss. In almost 30% of flipped houses, the profit made by the investor was less than 20% of the total purchase price.
If you are looking to flip houses, there are some things to consider.
The first concern is how much money you will need to put into the property that you purchase. If you purchased the property at or under market price, there is probably a reason why. Sometimes the reason is obvious, and can be revealed with a visual inspection of the property.
Other times, you will need an inspection of the property to discover problems, which is done during the process of contracting and closing on a home. Of course, if the inspection reveals problems, the investor should be prepared to sink whatever money is needed to get the property into sellable condition.
Other problems may take in depth legal or title work to reveal.
For example, a property may have converted a room or garage, but the conversion violates city code or association rules. Property that you buy may have fencing around it that actually includes property that is not yours. There may be accruing code violations for overgrown shrubbery or other problems. There may be an unrecorded line, fine, or encumbrance, which does not show up in the public records.
There may also be legal problems associated with the property, especially if you are purchasing the property at foreclosure. Are there liens (loans) that were not wiped out by the foreclosure?
Some loans, city fines, or federal tax liens, may survive the foreclosure and sale of the property, leaving you to either foot the bill, or even if you are not personally liable to pay the money, the amount owed must be paid at closing, thus eating into—and potentially completely eliminating—any profit that you stand to make.
Questions about buying or selling investment property, or property that you will make your home? Contact our real estate attorneys at The Law Office of Agnes Rybar LLC to help you with any kind of transaction involving your property.