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Uncertain Times for "Property Flippers" 08/14/2010

The first thing that should be noted is that flipping houses is a great way to bring home a rather large profit in a relatively short amount of time when doing so in a so-called seller's market. The problem is that we currently seem to be experiencing what is known as a buyer's market from one end of the United States to another. Foreclosures are at an all time high, which means that the market has suddenly been saturated with properties for sale.

While getting your hands on a low-priced property is excellent news, it also creates difficulty in convincing buyers to pay top dollar when there are better bargains down the road. This of course is one of the primary risks involved in the real estate investment venture that is known as flipping properties. The massive profits that most investors seek cannot be accomplished if the property cannot be purchased, rehabbed, and sold quickly.

The smart property flipper approaches his/her business with the knowledge that certain financing program guidelines prohibits the reselling of a property within ninety to a hundred and twenty days of the seller's obtaining title, so s/he will approach the entire transaction (from the purchase to the closing table of the resale) with extra reserves to buffer the mandatory period. I'm sure this "wait-before-you-resell" period was not welcomed news to many property flippers when the FHA adopted the guideline in 2009. It's one heck of a "cooling off period", wouldn't you say?

Unfortunately, at the moment, very few properties in any city are selling too terribly quickly. The worst case scenario in a situation like this is that you are forced to either absorb the loss (which can, in extreme cases, result in serious financial hardship or bankruptcy) or rent the property out (which will in most cases negate all the efforts that were made to rehab the property. An inability to sell the property that is being flipped is probably the worst fear of every property investor who engages in this sort of investment. In these cases it is often better to drop the price and take a loss than hold out for a better price risking further losses.

These are not the only risks associated with flipping properties unfortunately. Another risk would be the risk of seriously underestimating the amount of money that will be required in order to do the necessary work. This is something that many first time-investors find is a fairly common occurrence. Most people have unrealistic expectations of exactly how far their dollars will go when it comes to investing in the materials and labor needed to properly rehab a property. Even minor cosmetic repairs throughout a house can easily run into several thousands of dollars in order to repair. The flip side is that once these repairs are made the potential profits run into several tens of thousands of dollars.

The smart property flipper knows about the financing programs that provide rehab financing for his/her buyer and as such will structure the property resale in a way that would encourage potential buyers to purchase based upon their personal repair/rehab options. In other words, instead of fully repairing the property from their own funds, smart property flippers would price the property in a way that would allow qualified FHA buyers to finance the purchase utilizing FHA-203k and "Streamlined K" financing, both of which encompasses needed repairs.

Another risk that isn't often considered is the risk of overestimating abilities. This is one risk that costs not only precious time but valuable money as well. Not only is material wasted in the process of discovering you aren't exactly skilled in any particular tasks but also there are further expenses (often unplanned) involved in hiring the professional to repair the damage and replace the material that was wasted. When in doubt, it is almost always best to hire a professional if at all possible. Not having a pro can also lead to missing deadlines, going seriously off schedule, and adding yet another mortgage payment (if not more than one) to the overall price of the project which could result in foreclosure.

The final risk is often something that simply cannot be seen or anticipated. This was experienced in the days immediately following 9-11 and should not be forgotten. The unforeseen happens every day. Markets crash; local economies can be devastated by the announcement of a major employer that it is going out of business (think of the collapse of companies such as Enron and World Comm and what they did to local economies). In these instances, the market will take quite a while to recover from the shock to its system and 'flippers' among other investors are often left feeling just as lost and devastated as those that were victimized by these companies, both through no fault of their own.

The smart property flipper knows that stuff happens and those things that we have absolutely no control over are almost always the things that affect us most profoundly. The same holds true when it comes to property investment. The state of the economy, the housing market in an area, and sudden announcements that affect either can often have the most profound impact on those who are investing in real estate property. It is for these reasons that the smart property flipper places a great deal of importance on decisions relating to acceptable risks.

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