When you flip a house, the idea is to take an undervalued property, upgrade it, and then sell it for a reasonable profit.
However, you shouldn't buy just any dilapidated house to fix up and hope to make money on it.
In general, you must weigh the answers to two questions before making a deal on a potential flip house.
First, how far below market value can you buy the property for? Second, how much will you need to spend on renovations to bring the property up to a standard where you can sell at a profit? The answers to both questions must be in your favor.
Ignore this principle, and you set yourself up to take a loss on your flipped house.
Here's an example of an unfavorable answer to the first question.
You see a house with a few flaws such as an overgrown yard, paint flaking off the exterior, and a cracked driveway.
You realize right away that all the property needs is a little work to make it look pretty.
However, this is not the type of house you want to try to flip.
The seller probably doesn't think his house is in poor shape.
He may be well aware of what other homes in the neighborhood are selling for, and he believes he should get a similar price.
In this situation, you have to pay something close to market value to acquire the property.
When you consider the renovation costs, closing costs, and other expenditures that you'll face, you won't be able to sell this particular house for a high enough price to make a worthwhile profit.
So as tempting as this easy fix-up may be, you must avoid buying this house.
Next, here's an example of an unfavorable answer to the second question.
You see a truly decrepit building.
It has serious problems like major structural damage, flooding in the basement, and a faulty sewer system.
The house is a mess, and so if you wanted it, you could buy it for a song.
But again, this is a house to avoid, no matter how low the price.
If the property has major structural, environmental, or geological problems, fixing the problems will be too costly.
Chances are, once you started repairing the obvious flaws you would run into a host of related issues that would drain your bank account.
And certain problems simply can't be remedied.
Significant earthquake damage, unstable ground underneath or nearby, and pervasive mold are only some of the issues that make a house unsafe, unliveable, and completely unviable as an investment property.
Save yourself the headache and stay away from this real estate wreck.
Finally, here's an example where both questions are answered in your favor.
This particular house is so ugly and unappealing that a typical home buyer won't give it a second look.
It also has problems like a sagging foundation, no landscaping, and upgrades needed to the heating and plumbing systems.
Repairing these flaws is too expensive or too complicated for the average home buyer to consider.
But you, with your discerning eye, see the jewel the house could be with some creative fixing up.
The property's flaws force the owner to sell it to you at a price well below market value.
However, the flaws that brought down the price and discouraged other buyers are actually problems that are completely fixable, with the help of professionals.
And once you add value to the property with attractive features and amenities, this ugly duckling house will be transformed into a beautiful and inviting home.
With some careful planning, the property will be easy to sell at a much higher price than what you paid for it.
A house like this offers the most potential for profit.
Invest in this type of property for your flipping project, and your hard work is more likely to pay off for you.
However, you shouldn't buy just any dilapidated house to fix up and hope to make money on it.
In general, you must weigh the answers to two questions before making a deal on a potential flip house.
First, how far below market value can you buy the property for? Second, how much will you need to spend on renovations to bring the property up to a standard where you can sell at a profit? The answers to both questions must be in your favor.
Ignore this principle, and you set yourself up to take a loss on your flipped house.
Here's an example of an unfavorable answer to the first question.
You see a house with a few flaws such as an overgrown yard, paint flaking off the exterior, and a cracked driveway.
You realize right away that all the property needs is a little work to make it look pretty.
However, this is not the type of house you want to try to flip.
The seller probably doesn't think his house is in poor shape.
He may be well aware of what other homes in the neighborhood are selling for, and he believes he should get a similar price.
In this situation, you have to pay something close to market value to acquire the property.
When you consider the renovation costs, closing costs, and other expenditures that you'll face, you won't be able to sell this particular house for a high enough price to make a worthwhile profit.
So as tempting as this easy fix-up may be, you must avoid buying this house.
Next, here's an example of an unfavorable answer to the second question.
You see a truly decrepit building.
It has serious problems like major structural damage, flooding in the basement, and a faulty sewer system.
The house is a mess, and so if you wanted it, you could buy it for a song.
But again, this is a house to avoid, no matter how low the price.
If the property has major structural, environmental, or geological problems, fixing the problems will be too costly.
Chances are, once you started repairing the obvious flaws you would run into a host of related issues that would drain your bank account.
And certain problems simply can't be remedied.
Significant earthquake damage, unstable ground underneath or nearby, and pervasive mold are only some of the issues that make a house unsafe, unliveable, and completely unviable as an investment property.
Save yourself the headache and stay away from this real estate wreck.
Finally, here's an example where both questions are answered in your favor.
This particular house is so ugly and unappealing that a typical home buyer won't give it a second look.
It also has problems like a sagging foundation, no landscaping, and upgrades needed to the heating and plumbing systems.
Repairing these flaws is too expensive or too complicated for the average home buyer to consider.
But you, with your discerning eye, see the jewel the house could be with some creative fixing up.
The property's flaws force the owner to sell it to you at a price well below market value.
However, the flaws that brought down the price and discouraged other buyers are actually problems that are completely fixable, with the help of professionals.
And once you add value to the property with attractive features and amenities, this ugly duckling house will be transformed into a beautiful and inviting home.
With some careful planning, the property will be easy to sell at a much higher price than what you paid for it.
A house like this offers the most potential for profit.
Invest in this type of property for your flipping project, and your hard work is more likely to pay off for you.
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