By: Cody THOMAS
Flipping real estate is a perfectly legal, highly lucrative method of real estate foreclosure investing. Often mainstream media describes mortgage fraud in terms of flipping real estate, but this is incorrect. In a mortgage fraud scheme, multiple parties inflate appraisals, alter loan applications and institute other highly illegal real estate activities.
Flipping a foreclosed home, however, consists of purchasing an undervalued property in need of work, repairing it, and placing it back on the real estate market for a higher price. The foreclosed home may be purchased at any time foreclosure investing seems optimal, and often the pre-foreclosure period yields the most lucrative results. This type of flip is known as a retail flip and can yield large profits. It is somewhat time consuming, however, as the rehabilitation phase of a home can last varying amounts of time. This method often requires more initial cash or financing to get it off the ground. For the most part, retail flips are best executed with homes that require minimal structural repair and benefit most from cosmetic home improvements.
Another kind of home flipping that results in faster profits is wholesale flipping. In this situation, the investor gets an undervalued distressed or foreclosed property under contract to purchase and then sells that contract for a fee to another real estate investor who actually closes on the flipped property. In this way, the primary investor acts as wholesaler by amassing undervalued properties that are then distributed among a number of other investors.
Real estate investment and flipping homes can have a positive effect on a neighborhood by encouraging the restoration and rejuvenation of a declining area. Newly remodeled homes also draw new populations to an area, encouraging economic increases and social fluidity. With all of the recent popularity of flipping — as many as a fourth of all home buyers never intend to live in the homes they purchase — a potential investor needs to take precautions. While flipping presents exponentially large profit potentials, it also poses large risks. A few simple steps, however, can help protect the aspiring real estate investor.
Educate yourself on the neighborhood you want to buy into to understand how similar investment properties are selling. Then create a business plan to adhere to. This will help keep you close to your goals despite all the craze surrounding real estate flipping right now. If you feel compelled, you can put together a real estate business team to aid you including a home inspector, contractor, realtor, tax accountant and attorney to help guide your decision-making. Finally, prepare for the worst and think long term. Though these suggestions might seem bleak, those who are most successful in real estate flipping are the ones who are prepared if a house that only appeared to need cosmetic improvements actually needs a new foundation and can handle the financial interruption such a situation might pose. If you’re prepared to handle the risks associated with real estate flipping, it can be a highly lucrative endeavor.
