You are probably familiar with shows such as Desert Flippers, First Time Flippers, Masters of Flip, and Windy City Rehab. In these programs, real estate investors buy an income property below market value, renovate it, and then sell it off at a higher price. Thanks to these real estate shows and, mostly, the potential profits, the real estate investment strategy of house flipping is becoming increasingly popular in our world today. A recent report by ATTOM Data Solutions revealed that 245,864 condos and single family homes in the US were flipped in 2019. This represented about 6.2% of all home sales in that year. So if you are looking for an investment property to rent out, you are likely to come across several rehabbed houses for sale.
How Can You Tell If You’re Buying a Flipped House?
What are the signs that the property you are about to purchase is a flip? Here’s how to know you’re buying a flipped house:
- No inhabitants – Usually, the real estate agent will let you know why a property is uninhabited. For example, they will tell you that it was an inheritance, or that the owners traveled out of the country. But be sure to do your own research to find out why the house is vacant as it could be a flipped house.
- Perfect surfaces and finishes – The idea of flipping is to make a house look perfect to the potential buyer. New floors, glossy kitchen cabinets, and sparkling granite countertops are dead giveaways that a home is a flip.
- Everything is new – If everything in the property for sale including the fixtures and appliances is new, then you are probably purchasing a flipped house. Unless, of course, it is a newly built house.
- Staged – For flippers, home staging is a must in order to attract potential buyers and make a quick sale. Whenever you attend an open house, keep your eyes open for the tell-tale signs of a flip.
- Old systems – Usually, flippers don’t replace the major systems in a house unless they are in a very bad state. Such replacements would cost too much, thus eating into their profits. A quick look at the condition of hidden pipes, the boiler room, and the basement will show you whether the house is a flip.
- Recent transaction record – A good realtor should help you access the history of transactions for the investment property. If you discover that the last transaction happened within the last year or less, then it is obvious that the house is a flip.
6 Things to Consider Before Buying a Flipped House
Buying a flipped house to rent out is a decision that should be made with utmost caution. It has been said that you should never judge a book by the cover and this applies to real estate investing. Wondering what to know when buying a flipped house? Here are 6 major things you need to consider and research before moving forward with this type of purchase.
1. Check the prior condition of the flipped house for sale
Flipped properties are sometimes bought as real estate owned homes or bank-owned homes by real estate investors. When a property becomes bank-owned, it has probably remained vacant for a considerable amount of time. A house that remains unoccupied for a long period is likely to develop a wide range of problems including mold, termites, leaks, and frozen pipes. Knowing the prior condition of a flipped home will help you establish what work and upgrades should have been completed.
2. Research the flipper
In any real estate market, you will find a handful of quality flippers but also many sub-standard flippers. This is why it is very important to investigate the seller before buying a flipped house to rent out. Is this the first investment property they are flipping? What contractors did they work with for their flips? An experienced local real estate agent could help you get such details. You could also google the name of the seller to dig up more information about them. If it’s a company doing the flip, check them up on Better Business Bureau.
3. Conduct a home inspection
One of the dangers of buying a flipped house is that the seller might have done a shoddy job. New finishes, fresh paint, and other cosmetic improvements can blind buyers to bigger issues. This is why a thorough inspection of a flipped house is crucial.
Here are some of the things that you must examine during the home inspection:
- Electrical wiring
- Heating systems
- Fan ventilation
- Windows and doors
- Fireplaces and chimneys
Besides the standard home inspection, you should also conduct a mold inspection, termite inspection, and even sewer inspection. Such inspections could save you lots of frustration and money down the road.
4. Check for permits
Quite often, renovations such as building a patio or adding a fence will require a certificate of compliance or permit. If you buy a flipped property and parts of it are found to be unpermitted or out of code, you are likely to incur serious penalties. In addition, you might have to demolish part of your new rental property. To avoid this, visit the local municipality office to find out whether certificates of compliance or permits were issued for upgrades and additions to the property.
5. Consider the price of the investment property for sale
House flippers want to make as much money as possible from their real estate investment. As a result, some may exaggerate the after repair value (ARV) of the rental property for sale. So, how much should you pay for a flipped house? Besides looking at the improvements in the home, consider other factors such as the state of the neighborhood and the prices of comparable properties (real estate comps) in the area. An experienced real estate agent will help you examine all these factors and make a reasonable bid for the house. You can also find real estate comps using software like Mashvisor.
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6. Consider potential earnings from the rental property
Before buying a flipped house to rent out, you need to conduct a rental property analysis and figure out the return on investment. Mashvisor’s rental property calculator uses predictive and traditional data, as well as historical and comparative data to calculate the cash flow, cash on cash return, and cap rate of any investment property for sale. This tool comes with additional features that will help you conduct a complete neighborhood analysis and determine the optimal rental strategy (Airbnb vs Traditional).
Buying a flipped house can be very tricky, especially for beginner real estate investors. Minding your due diligence will help you avoid potential pitfalls and allow you to make the right decision. Using this guide, you now know what to look out for before buying a flipped house. So start searching for and analyzing investment properties for sale now to find the most profitable one.