Real Estate Flipping Basics
Real Estate Flipping Basics
Michael Corbett (Real Estate Expert) gives expert video advice on: What is real estate development, or 'flipping'?; What is 'real estate speculating'?; Who can engage in real estate flipping? and more...
What is real estate development, or 'flipping'?
There are lots of different types of ways to invest in real estate. One that people hear about a lot is called real estate flipping. I'm going to explain what flipping is and what it's not. Flipping, to me, means buying a property, fixing it up, actually adding value to the property yourself and then selling it. The other term we sometimes interchange with incorrectly is actually real estate speculating. Speculating is not something I support. Speculating in real estate is where many, many people, especially right now, are going to lose lots of money and lose their fortunes in real estate.
What is 'real estate speculating'?
Let me explain what 'speculating' is. Speculating is not flipping. Speculating is buying a property that hasn't been built or is about to be built or is already built and is sitting available and someone buys it hoping that it will increase in value because the market is going up. However, when the market is going down, as it is now all across America, and in many, many cities it has gone down severely, you are not in control of the property and the value, the market is. So if you've speculated and bought something hoping the market will make you money, you're going to lose. I'm a big proponent in not speculating. I'm a big proponent in flipping because when you flip; you are taking control over the market by adding value to the property with your own hands. You are not expecting the market to bail you out.
Who can engage in real estate flipping?
One of the reasons why I wrote "Find it, Fix it, Flip it" is that it is an arena and an area in real estate that anybody can do. You start small, and I teach this, it's about starting small, being conservative, starting with a small investment and working your way up the property ladder. It's a very practical way to get in to the market, it's for people who want to get in the market and for people who want to begin their road to real estate success.
What kind of property should I consider for my first real estate investment?
When I tell people to start small when getting into real estate, all I'm really teaching them is how to take the money that they do have and match that with the size of the house they're going to buy. In other words, don't over extend yourself. Make sure you have enough money left over to actually make the repairs that are needed to the house, and start in maybe a transitional neighborhood. You're not going to be able to buy a big condominium in downtown Manhattan or in the best neighborhood in Milwaukee. You're going to have to go to a transitional or a fringe neighborhood. Find a smaller house, start with that. Make your mistakes on the first property that's a small one, because they're smaller mistakes and there is a big learning curve. Once you've done your first house, it is so much easier to get a second and third. So buy the first house, and buy it small. Don't spend a lot of money on it and be smart.
Should I get a real estate license before I start flipping properties?
A lot of people ask me "Hey, why don't I become a real estate agent, and get my license because then, I'll save so much more money when I go to buy a house"? That's ridiculous! That's like saying I'm going to go to medical school, so that I can perform my own brain surgery. I am a big believer in working with the experts. You have real estate agents, and they are the experts. Let them do their job. You handle looking for the house and working with them to find the right one, and then going to work once you buy it.
What are the legal considerations in flipping property?
I'll give you a great piece of advice. When you're going to flip a property, which means your going to buy a property, you're going to fix it up, and then you're going to sell it, don't cut corners. Do everything to code, and make sure you get permits. Because when you go to sell that house, I want you to disclose all the work that you did. Because you're basically buying a product and then selling it to someone else. So, you want to everything properly, legally and to code.
What kinds of property may be 'flipped'?
I talk about, when looking for a flipped property, there are three different kinds of properties that are out there. And they're all under “the fixer” category. They may be condos. They may be co-ops or they may be homes. Or they may be town houses. But they're three different kinds of “fixers”. One is a cosmetic “fixer”. One is a “tear-down” and one is a “downright ugly”. Now you don't want to buy all three of those types of “fixers”, you really only want one. The cosmetic “fixer” may sound really appealing because you think “wow, just a little fluff and clean it up”. But the problem is when you're buying a cosmetic “fixer”, it's really not being sold at a reduced enough price to actually allow you to make any money when you flip. Everybody knows that they can go to a home improvement center, fix it up in a couple of weekends and it's done. The “tear-down”, obviously, you don't want that because you don't know what the problems are. It could be geological. It could be structural. There could be mold. There could environmental or drainage. You don't buy a “tear-down”. The one you want is the “downright ugly” because when you walk in and any other buyer walks in at the moment they going to go “This is downright ugly”. But in my book, for example, that‘s how I teach how you can actually find the house with the right things wrong. It's going to be the “downright ugly” house.
Why is real estate flipping so popular right now?
Real estate flipping has always been very popular. It has gotten a lot of notoriety when the market was skyrocketing. Mainly because anybody, and I call them day flippers, just like day traders, anybody's grandmother or a monkey with a credit line was able to come in and buy a house and make money. That's not true anymore but that excitement and that thought, "I'll just buy a property and make a hundred thousand dollars", people think that is the reality. The TV shows that are out there, and I know many of the producers, they like to perpetuate and keep that going because it is good TV. When you watch one of those shows you are not watching it, please don't watch it for the education. Please only watch it for entertainment. They are not portraying the full picture and they are not telling you all the numbers and everything you need to know. To go into flipping you have to be educated and you have to know what you are doing. Yes, you can make lots of money in it but don't just watch those particular shows and think, "Wow, I can do this", educate yourself first.
What types of home upgrades most enhance resale value?
When looking for a property to flip, to find the one with the greatest potential for profit, I look for a house that has lifestyle upgrades. Now what that means is a house that has the ability to increase in value by increasing the liveability in a house. Those things aren't necessarily the most expensive fixes. For example, in a metropolitan city, if you have a home that is sort of near the street but set back a little bit, you want to create a wonderful fence with wisteria vines and a sense of privacy. Or putting in hedges around the backyard to create a backyard oasis. Those are lifestyle upgrades that don't really cost a lot of money, but they increase the value and the perceived value of the house. So looking for houses with lifestyle upgrades such as those, those are the houses that really will make you the greatest profit potential.