Flipping houses is not an easy process. On TV shows like Flip or Flop or even Fixer-Upper, they make the process appear to be seamless. These made for TV flips are nothing what it is like to get involved in house flipping. However, the most time consuming part of house flipping surprisingly isn’t the actual renovation, it is the process of finding a real estate investment to purchase!
Now you probably are thinking how hard could it be to find a property to buy? Well it isn’t an easy process. There is a lot of time, research and effort that goes into finding a good investment property to purchase. One of the first things you need to do is look for deals. You can’t purchase a home to flip that isn’t going to have enough profit or is possibly going to be a flop on the profit end. With real estate prices continuing to rise those deals do not come along often. One of the best ways to get a potential deal is to purchase a foreclosure property, however you need to be careful when doing this. Many of these properties are sight unseen and/or are an as-is purchase. You need to do your due-diligence when purchasing one of these properties – which takes time.
In Connecticut we have a few different options for purchasing foreclosure properties. Banks list properties with a real estate agent and you can go and view the property and check for things like burst pipes, missing mechanicals, water damage, etc. All of these types of listings you can find on a website like Zillow or Realtor.com Another option is to go to a live foreclosure auction which you usually don’t get to actually see the inside of the property. This option can be risky but can also be very rewarding because many people are hesitant to bid on a property they can’t actually go into. You can find these properties in your local newspaper or usually on the court website in your state or local county. One other option for foreclosure properties is to take part in an online auction and sometimes you can view these properties prior to bidding, but most of the time they are also sight unseen.
Prior to purchasing a foreclosure you need to do your research – especially with an auction. There is a chance you could get stuck having to pay past-due real estate taxes and or past-due association dues. In order to check on this you need to go to the town hall where the property is located and check if there are past-due taxes. You also should check to make sure there are no liens on the property. If there are liens on the property it is best to contact your lawyer and have him/her look into seeing if title insurance will cover any liens.
You should also check the property card to make sure everything is listed properly – you don’t want to have to deal with illegal rooms, bathrooms, decks, etc. if you don’t have to. I also suggest if there is an addition on a home to check with the town’s building department to see if there was a permit taken out for that addition. This can come back to bite you when you go to resell and the buyer gets the property appraised.
In cold weather states you also need to be aware that many older homes may have abandoned oil tanks buried on the property. If there are pipes sticking out of the ground there may be an oil tank buried on the property. When an oil tank is abandoned it needs to be removed and the soil needs to be remediated, which can cost thousands of dollars. I am not saying you should completely stay away from a property like this, but you need to take this into consideration prior to purchasing the property.
In addition to conducting all this research before you decide to purchase a foreclosure you need to create a budget for all the required updates the property will need. If you can’t get into the property to see what updates it needs, to play it safe you should assume it will need everything – kitchen, bathrooms, paint, heating/cooling system, etc. I highly recommend at least driving by the property prior to bidding on it as well to check the outside conditions – roof, windows, doors, siding, etc. These are all items that can be costly and you need to put them into your budget. Don’t forget to also include other costs like attorney fees, taxes, utilities, realtor commissions, taxes when you sell the property, title search/insurance, etc. These are all costs that take away from your bottom-line. After you figure out all these fees add in a buffer for unforeseen costs and then if you are going to make a profit of at least $20,000 then it is worth your time trying to get the property. The reason why I believe you should at least be making a profit of $20,000 on a property is that anything less and you could risk falling into a flop. What if there are unseen expenses and you only planned on a $10,000 profit? You could end up in the negative.
As you can see, this is a long process. We have spent hours doing this on multiple properties only to have an auction be canceled, an offer not accepted or we decided not to try to get the property because there was not enough profit to be made.
In the past two months we have looked at over 100 properties. We have attended multiple auctions and have put in multiple offers on other properties and out of all this leg work we purchased two homes. So you can see a lot of work goes into flipping a home even before you start the remodeling process. Do you have what it takes?