Flipped properties are hidden gems: they’re located in decent environments, already renovated and upgraded, and move-in ready. However, the problem with investing in this property type is that it can be deceiving. The aesthetic appearance can hide a slew of problems with the property.
Therefore as a real estate investor, how should you go about buying a flipped house? This article is a complete guide to buying these properties. As part of this article, we’ll go over what “flipped” means, the pros and cons of investing in these properties, and the factors you should consider before investing. Without further ado, let’s delve into the ins and outs of buying a flipped house.
What Is a Flipped House?
A flipped house is a revamped property. It’s usually the final product of the fix-and-flip investment strategy. The fix-and-flip investment strategy is a short-term strategy in which the property investor (known as a flipper) buys a dilapidated property below the market value, revamp it, and put it up for sale at market value. Flipped properties are usually move-in ready because they come with all the things required by the prospective homeowner.
Buying a flipped house sounds like a better investment. Right? But before going all-in on this property, you should remember that the flipper is also investing for profit. So if you want to invest in these types of property, you need to take extra caution and do your due diligence. That brings us to the next part, where we’ll discuss the pros and cons of buying a flipped house.
Why Should You Consider this Investment?
Although a flipped house is a profitable investment, an investor should have a convincing reason to invest in these types of property. So in this section, let’s discuss some of the benefits of buying flipped properties.
No Upgrade Needed
The conventional rental property investment process is searching for properties, buying a property that aligns with your checklist, renovating and upgrading to suit your requirement, and renting out to a prospective tenant. Following that conventional process of renovating and upgrading the property means you’ll be spending money and stressing yourself to make things work out.
But when you buy an already refurbished property, you’re buying a new property (though not entirely new), which comes with all the necessary things the tenants need. And with this, you eliminate the renovation and upgrading process, and in turn, you’re saving yourself the stress and financial obligations required by the property renovation and upgrade.
Competitively Priced and in a Good Location
Remember! A flipped property is also a product of a real estate investment strategy (like we discussed in a previous section). The current owner is also an investor who wants to make money from the flipped property. And that means they had already done their due diligence for the property’s profitability, i.e., the investor has checked for the property’s ROI, demand, Cashflow. So if you buy a flipped property, it’s likely to be located in a good environment with the potentiality for a higher ROI.
Moreover, for the fix-and-flip investor to maximize profit, the property must be renovated and sold in a short period (like within three to four months). That means, unlike a homeowner who was only trying to get rid of the property, the investor needs to sell it ASAP. So instead of an outrageous price that will attract unnecessary bargains that wastes time, the seller would likely list the property at a competitive price to attract serious buyers who are willing to close immediately.
Unlike conventional properties, a flipped house has been revamped with the necessary upgrades. It comes with the equipment and required home utilities. So instead of waiting for weeks or months before it can start generating revenue, the investor can lease out the property as soon as they close and become theirs.
Understangding the Risks
A flipped property is an old, dilapidated property renovated and upgraded to increase its value and sell at the current market value. Though the house looks new, the underlying structure can be weak, which means a flipped property can also be dangerous. So in this section, we’ll talk about the likely problem you might encounter if you buy a renovated house. Without ado, let’s dive in!
Sleek Design May Cover Structural Problems
Most short-term investors are flipping a property for profit, which means they’d only do things that will increase the potentiality of making more money (like changing the floor, windows, and doors, repainting the property, and so on). That means most flipped houses are just like pouring “new wine into an old wineskin.”
The surface design will only increase the investor’s profit potential and not solve the underlying problem with the property (if there is any). It might even increase the risk involved because it’s hiding looming danger.
So as a long-term investor, buying a flipped house without performing your due diligence can mean you’re washing your money down the drain because you may be inheriting a problem.
Permits and Compliance With Local Regulations
Another problem with buying a flipped property is that the owner might cut corners by not acquiring the required permit or complying with the necessary local regulations for the renovation. And so, if you rush into buying this type of property without verifications, you’d be inheriting debt on a property that supposes to be profitable.
For instance, if the property flipper wants to add another room to the existing structure, the right thing to do is to collect approval from the regulators. But because the investor wants to maximize profit, they cut corners and build without permission. So if the local agency discovered the issue after you buy the property, you would be required to pay because you’re currently the legal owner of the property, even though you didn’t commit the crime.
Since the investor has no particular buyer in mind and has to sell it asap, they’ll design the property to appeal to the general homebuyer market. And, as an investor with a strategy, buying this type of property may not appeal to your target audience.
Factors to Consider
While buying a flipped home is an intelligent investment decision, not doing your due diligence can turn your potentially profitable investment into a money pit. That means you need to be cautious when investing in flipped houses. In this section, let’s discuss the factors you need to consider when buying a revamped property.
In real estate, a home inspection is an essential part of every investment deal. A certified inspector helped to check if the property aligned with what the owner said it was. A conventional inspection usually verifies the property’s structural elements like the roof, foundation, and so on.
However, when buying a flipped house, it’s usually advisable to go beyond the conventional inspections. Why? As a refurbished property, the flipper might already fix some sections that could be checked during traditional inspections. And so, the inspector might not be able to catch problems with the flipped house. For this reason, you’re should go beyond the conventional inspection process and check for mold, termite, sewer system, and so on.
Check for Permits and License
Don’t be deceived by a property’s appearance; a flipper will likely do anything to maximize profit. That means some investors can cut corners to increase their potential profit on a property.
Instead of just going all-in because a property ticks all requirements, learn to verify permits and license acquired for the renovation works. To do this, you should politely ask for a list of upgrades and renovations done on the property. With this list, you can check if the property owner acquires the necessary permits and license from government agencies before undergoing the renovation project.
Background Check on the Flipper
Another factor to consider before buying a property is running a background check on the flipper. With this verification process, you’d be able to discover if the fix-and-flip investor has a good history of property flipping. And in turn, you’d know if buying the flipped property is not a sham. Here are some ways to do a background check on the flipper:
- Ask fellow investors for the credibility of the fix-and-flip investor.
- Talk to local real estate agents.
- Ask for references of properties the investor has worked on and talk to the property buyers.
- If it’s a company, check online reviews and look them up on Better Business Bureau.
- Search the company/investor’s name plus “lawsuit” on search engines (like google) to know if someone has sued them before and for what offense.
Run the Numbers
One of the ways to perform your due diligence is by running the flipped property through a series of tests, and one of the ways to do this is thorough Comparative Market Analysis (CMA). CMA is a research strategy where the investor compares the property with similar property in the area. This strategy helps the investor determine if buying a flipped house is a good investment or a money pit. You can perform a CMA by talking to experts (like real estate agents or property investors) or checking online on listing sites like Mashvisor.
Furthermore, as a rental property investor, it’s significant to verify if the property will be suitable for renting. This verification process can be done manually by calculating the required numbers using existing formulas or using different rental property calculators (like Mashvisor’s rental property calculator) available online.
The Mashvisor rental property calculator is an AI real estate investment tool, which uses traditional and predictive data to calculate the rental property’s profitability. This tool uses the property’s historic and comparative data to calculate the cap rate, cash on cash ratio, occupancy rate, and so on. For efficient results, this tool also analyzes the property’s location and compares it with the result to determine the highest potential as well as the optimal strategies to implement.
What’s Your Financing Option?
Although buying a flipped house undergoes the same processes as buying a conventional real estate property, finding a financier for the former is usually hard. Why? Mortgage lenders consider the fix-and-flip investment strategy risky. And so, they don’t look so kindly at it. For this reason, they introduced a very stringent lending process to discourage investors from the strategy.
So, before proposing an offer to buy a flipped property, you should have a financing option on the ground. You can’t use conventional mortgage options insured by federal agencies (like the FHA loan) because the rules are more stringent for buying flipped properties.
For example, FHA-backed loans required the previous owner to hold the property for more than 90 days before selling. And most fix-and-flip investors fix and flip properties within 90 days. That means you may not qualify for the mortgage.
Carefully Craft the Contract for the House Deal
Another significant thing to consider is the sales contract. Since flipped houses deals are different from the most conventional processes, you should be creative and careful when crafting a sales contract. Ensure you include the right contingencies in your contract (like the appraisal, inspection, and financing contingencies) to make it easier to walk out when there seems to be a problem with the deal.
Moreover, no matter how attractive the property looks, don’t forget it’s a revamped property. So always ask for warranties on the property. Ensure you include it in your sales contract. Ask for a guarantee on the utility and the upgrades done. If you’re overwhelmed by this process, you can talk to an experienced real estate attorney with experience in buying a flipped house.
Do a Final Walk Thorugh
Even though a professional inspector has certified the property, their certification doesn’t mean the deal ticks all your investment checklist. And as you already know, flipped property investors need to be extra careful to avoid mistakes.
So before signing on the dotted lines, you’re should do one last thorough walkthrough to verify things yourself. Check out for red flags that the home inspection may not detect. Below are some of the red flags an investor should be on high alert for:
- Rusted pipes and improperly fixed plumbing works
- Doors and windows not installed property
- Poor water pressure from faucets and fixture
- Leaking Pipes
- Poor repair in the Attic, crawl spaces, or other less visible areas
The Bottom Line
Buying a flipped house is a good investment but can be a money pit if you’re not on high alert. So if you want to ensure you’re doing everything right, make sure to consider the factors laid down in this guide. Also, be sure to work with experienced professionals if you feel like you need any assistance.
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