Can you flip in a hot market?
In a tight sellers’ market, is it still possible to buy a house ripe for renovation and sell it for a profit? It is possible to flip homes even in the hottest of markets, if done wisely.
Most investors will apply the 70 percent rule when evaluating a home for purchase. That means that an investor should pay no more than 70 percent of what the home will be worth after it has been fully repaired, minus the cost of repairs. A wise flipper will use present values and not count on the hot market rising even higher in the time it takes to fix the house when coming up with the after repair value (ARV).
Here’s an example of calculating how much to spend on an investment property. Say comparable homes in the neighborhood that are already modernized sell for about $200,000. Applying the 70 percent rule gives you a purchase price of $140,000 tops. Now say it would cost $25,000 to repair the house to a level at or just slightly above those similar homes in the neighborhood. That gives you a purchase price of no more than $115,000. If you can find such a deal, then you might want to consider it. There are no guarantees, and a lot of the resale will depend on the quality of the repairs.
Bear in mind that the 70 percent rule does not mean that you will be seeing a 30 percent profit. There are other costs involved besides paying for repairs. There are financing costs, closing costs to buy and sell the home, inspections, carrying costs, insurance, taxes, utilities, yard maintenance, HOA dues, and the cost of your time. A more realistic expectation is probably more like a five to fifteen percent return, depending on costs. Again, a lot of that depends on the quality of the repairs being put into the property and the overhead involved.
Traditional lenders may be an option for you if you have enough cash on hand and you may find their costs are lower overall. Hard money lenders are more flexible and require less money down, but are more expensive. Some beginner investors find it’s easier to do their first few flips in an investing group or with partners. They’ll make less money on each flip, but carry a smaller risk and need less cash to get started.
Keep in mind that even though the reality shows like to say that renovations and flips can be done in 6 weeks, a more realistic time frame can often be three to six months, depending on the level of renovations. In a very tight market, the houses you are going to be able to buy for very low prices are likely going to be the ones that need longer, more extensive renovations. Another thing to remember is that contractors in North Texas are extremely busy right now. Projects might take longer than expected simply because finding labor can be tricky. You’ll be paying interest on that loan every day that the house is waiting for a buyer.
Flipping a house in a very active market can be done profitably, if done with caution and patience. You’ll want to have good experts in your corner helping you along the way, including Realtors, inspectors, lenders, contractors, and stagers. Understand that it’s a team effort.