Heads or Tails: Is Flipping Houses Too Good to Be True?

by Carrie Anton

If you've ever been awake in a zombie-like state in front of the tube at 3:30 a.m., you've probably seen infomercials claiming you can get rich quick with real estate. These programs are filled with promises of talking sellers out of their homes for next to nothing, buying property with no money down, and getting someone else to pay your closing costs. While it's possible that the investment methods these programs push may be the real deal, most are scams that should raise instant red flags for investors.

But the lines get blurred with the entrance of a new batch of real-estate investing programs. TV shows such as TLC's Property Ladder, A&E;'s Flip This House, and Discovery Channel's Flip That House, feature sellers who buy, renovate, and resell properties in order to turn quick, and often large, profits. These reality-based programs aren't trying to sell you anything, typically present the good with the bad, and air during the day--winning instant credibility in comparison with late-night infomercials. But if you've learned anything from infomercials, it's that if something looks too good to be true, it's best to proceed with caution.

"House flipping is not something to be entered into without a lot of thought, planning, and research," says Bill Golden, an Atlanta-based real estate agent. "As satisfying and profitable as flipping can be, it also can be devastating to someone who doesn't make informed decisions."

Golden has more than 20 years' experience in the real estate industry, and understands the flipping scene from his own practice. His first flip was a breeze. Before he had done practically anything to the house, someone made him a deal awarding him a substantial profit. But he quickly learned that all flips aren't created equal.

"The worst was a house that just seemed to be cursed," says Golden. "It had fleas, rodents, and a cat-urine smell I couldn't get rid of. A huge oak tree had fallen from the yard all the way across the street. And the first buyer I had for the resale backed out of the deal for no reason at all. I eventually did resell the house, but, had that been my first experience with flipping, it probably would've scared me away."

Smart starts for buying flippers

Before you can make a flip, you must purchase a house. If you're interested in flipping properties, there's a lot to take into consideration. Golden suggests you:

Get to know the neighborhood you're targeting. Research price ranges of the houses in that area, how long the average house stays on the market, and what the current market is like. Make a list of everything that needs to be renovated in the house and obtain estimates before you purchase the property. Remember, everything costs more than you think, so it's best to estimate on the high side. Create a budget. Factor in not only renovations but also how much it will cost to carry the house--pay the mortgage on it--before it sells. Be sure to leave room for "surprises."

"Most importantly, get the professional opinion of a neighborhood-specific realtor on the potential property as well as on exactly what you're going to do with it and at what cost," says Golden.

Don't forget about foreclosures

Flipping is most profitable when you find a house at a great price. While that's not always possible with homes on the regular market, foreclosures can open up some advantages.

"Foreclosures may allow you to get into a house with no money down or by assuming the homeowners' mortgage," says Denise Evans, author of "How to Make Money on Foreclosures." "Some lenders may even provide a moratorium on payments--say three or four months--in order to allow you to use the money to fix up the home."

"A person is most successful when buying a foreclosure for his or her personal residence," says Evans. But remember, a foreclosure that may be profitable to you as the buyer is rarely a win-win situation. Your bargain is someone else's loss.

Flips that flourish

You've worked hard to find the perfect property, but now it's time to get down to business. "One of the biggest mistakes that people tend to make is buying and renovating to suit their own personal needs or tastes," says Golden. "Your end product needs to be attractive to as many people as possible." Here are some tips to help your property appeal to more buyers:

Define who your target buyer is and what he or she would expect or want. Research trends in home decorating and design. Pay equal attention to the outside and inside of your house. You can't show off the upgraded kitchen and bath if potential buyers won't get out of their cars. Select neutral colors for paint and appliances.

Is flipping right for you?

This is a question only you can answer after careful research. Remember that there's more to consider than just the acts of buying, renovating, and flipping a property. You also need to factor in:

The amount of time this investment may take. Will you be able to turn the property around in a profitable time frame? The money involved. What will not making a profit or, worse, losing money, do to you financially? Will you be able to bounce back quickly? Tax implications. How much of your cut is going to Uncle Sam? Have you discussed this investment idea with your accountant or financial adviser?

Flipping homes is a risky investment but also can be very rewarding. Only buy in to the idea if you know you can make the sale.

May 29, 2006