Professionals on television make property flipping look easy. In fact, flipping requires a great amount of knowledge concerning real estate markets, remodeling trends, material costs, trade skills and more. Before jumping into the market, would-be flippers should be sure they are in a position to make a worthwhile profit.
Knowing the Cost
Flippers who do not have a solid grasp of the costs of property ownership will quickly find themselves accumulating debt rather than profit.
Of course, there is the sales price of the home, but there are also plenty of costs that go along with the sales price. First, both the buyer's and seller's real estate agents will collect a certain percentage of the sales price as a commission, which can cut into profits but help ensure a higher overall sale price.
Second, there will also be closing fees: application fees, appraisals, escrow fees, mortgage insurance, credit reports, a home inspection and more. These generally run between 2% and 5% of the sales price.
Monthly mortgage payments will need to cover both a portion of the sales price and interest on the sales price. In addition, property much be put into escrow, and the first few months may need to be paid upfront.
Then there are utilities for the home: electricity is needed to run power tools, lights, phones, and computers, while heat will keep pipes from freezing and water will run the toilets and allow workers to wash up.
Knowing How to Do the Job
Then there's the cost of the renovations themselves, and they bring with them even more requirements: a solid understanding of the projects themselves.
Most houses are not flippable. In order to make a profit, flippers have to sell a home for more than everything they put into it, and that is not an easy job. The first step is to find an underpriced home, and that requires knowledge of local real estate markets, be it in Dearborn Park or elsewhere. It is also good to know how quickly homes sell in the area. Otherwise, a flipper ends up sitting on a property doing nothing but paying bills.
The second step is to understand what features are most in demand in the area. Fashions change from location to location. Investing money into a renovation no one locally wants will lead to financial disaster. It is also important to be able to identify the weak points of a home so they can be addressed.
The third step is to make renovations for less than what it will sell for. That means finding material sources which give the best deals. It also means the flipper is going to personally provide as much labor as possible, which means being competent in many areas of home improvement and repair. But there will come a point when a flipper will probably face a task they are not equipped to tackle, and then they need to find an affordable, reputable contractor.
There are people who successfully flip, but it takes a lot of time and energy, and it comes with significant financial risk. Before purchasing a property, be sure you have both the finances and the skills to return a profit on what is a sizable investment.
Ted Guarnero, REALTOR® is a full-time real estate agent with over 1000 homes sold and $400 million in sales. Working with Compass real estate offering professional and effective real estate services to help you succeed in the local real estate market. Visit www.seeChicagorealestate.com for information on downtown Chicago real estate and to get in touch with an expert in the Chicago real estate market. Before you hire your next Realtor call Ted Guarnero 855-See-Chicago, it's on the House !