What to Know When Buying a Fixer-Upper Home to Flip

Just as an athlete can make the most trying tests of physical endurance seem like child's play, television has a way of making house flipping seem like a cake walk. Certainly, you've seen the shows. Energetic people purchase an ugly house, spend a week or two fixing it up, then sell it for a huge profit.

Easy, right? Not really.

As they say, numbers don't lie. And it wasn't long ago that the numbers didn't amount to a sizable payday for very many. RealtyTrac reported that investors flipped 152,862 houses in 2013. That is, they bought a house and sold it again within six months. While the number was increasing at a rate of 16 percent from 2012 and 114 percent since 2011, the average profit only netted $58,081. Considering labor and time involved, this doesn't amount to much.

Fast forward to present day, however, and the picture looks a little more promising. In the second half of 2016, homes sold on average for $189,000, an amount $62,000 more than the average purchase price of $127,000. This represents a 48.8 percent return on the original purchase price.

If you're interested in dipping your toes in this market, it's important to do so with eyes wide open. Take a look at these considerations so that you have a better chance at success in what can be a tumultuous market.

Consider Your Financial Situation Carefully

Before even considering house flipping, it's important to get your credit in order. With tightened lending requirements for home loans, particularly in the high-risk home-flipping industry, the need for excellent credit cannot be overstated.

Additionally, you likely need a good amount of cash. Many pay for the down payment using cash so that they don't have to finance mortgage insurance. If qualified, you can also take out a home equity line of credit. Most private investors want you to have some money of your own in the game for reassurance that you're really committed. Alternately, you can partner with someone who will fund the operation while you do all of the work.

This is a high risk business venture - one that could potentially lose thousands of dollars. Understanding the potential impact of failing to successfully flip a house is paramount before starting.

A Dream Team is Needed

House flipping isn't a solitary affair. Rather, it takes a team of people who will provide advice and expertise to ensure the highest profit margin possible. Some people that are often included on the team include a real estate attorney, a general contractor, a real estate agent, a designer or architect, a CPA, and a wholesaler. It also pays to befriend a money lender who will make your dream a possibility.

Location is Nearly Everything

Find a home in a desirable neighborhood or city that people want to live, like Loxahatchee River or another community. It doesn't matter how beautiful the house becomes, if it isn't where people want to be, you won't sell it. Look for areas with rising real estate sales, employment opportunities, and other cues that the area is on the upswing.

The Foundation Must be Sound

While it may be impossible to check for a solid foundation if you're buying the house at a real estate auction, bring someone with you who can accurately assess a building's plumbing, electricity, and overall construction. Although you can anticipate making major changes to the interior, it's important not to need a complete overhaul where the house is torn down before being rebuilt.

The Numbers Have to Add Up

Before buying, do some math to ensure you're going to come out ahead. Most important, look for the property's "After Repair Value", or ARV, which is the price you sell the house for after renovation. Your real estate agent can provide estimates after looking at comparable properties that have sold in the area. Next, look to the "Maximum Allowable Offer," which specifies the highest amount you'll be able to pay for the home.

Flipping houses is certainly not as easy as it seems on TV, and this information is just a starting point. If (after doing enough research on the many processes that go into improving a home for the least amount of money possible) you decide this is something you can handle financially and emotionally, start speaking with a real estate agent early in the process to make sure you find the right way forward.