Categories
Flipping

Why You Should Always Target Distressed Properties to Flip (And Where to Find Them)

Creepy old mansions may be a nightmare for most people, but they’re hidden gems for a house flipper. These oldie-but-goodie properties are examples of how distressed properties have great value within them, giving real estate investors opportunities to gain massive flipping profits.

Why are there distressed properties in the first place?

Well, there are a lot of reasons why a home could become neglected. Here are a few examples:

  • The home could’ve been a foreclosed home left to someone as inheritance, but it’s located far from where the person currently lives. The home left behind will often go into probate for a year, during which time the new owner cannot touch it. That means it’ll sit for a year, quickly deteriorating.
  • The home could’ve gone through a natural disaster like a flood or tornado, and the owner doesn’t have the funds to repair it. It’ll also sit there rotting away.
  • The home could’ve been a rental that a tenant trashed and the landlord can’t take it anymore—not bothering to fix the home up again.
  • The home could’ve been owned by a hoarder with low income. They pay taxes, sure, but they don’t have the money, skill, or energy to keep the house in good condition.

Any of these situations leave many homes neglected and, eventually, distressed. However, while these homes are someone’s problem, they’re certainly your investment opportunity.

Here are a few reasons you should buy distressed properties, and how you can find these lucrative deals.

The Flipping Opportunity with Distressed Properties

To understand how the concept works, we need to first discuss how a home becomes a distressed property. So, here’s what usually happens:

  1. Owner Hardship and/or Neglect: Owner of a property loses their job, becomes ill or perhaps relocates. They may also inherit the property.
  2. Property Deteriorates: The issues above lead to the property falling into disrepair. At a certain point, potential buyers either don’t want to take on the repairs or can’t get a standard mortgage on it due to the poor condition.
  3. Cash Opportunity: At some point the homeowner will try to sell the property. Or maybe a motivated flipper can convince them they should sell. Either way, they will have to sell at a discount due to the lack of market demand for the property when it’s in poor condition. 

Situations like these give you opportunities to buy properties at a low price. These distressed properties are ideal for flipping because they’re rundown homes with tons of hidden value. Yes, they’re cheap because they’re in poor condition, but the lack of market demand will drive the market value even lower than the cost of repairs. 

The Risks and Benefits of Flipping Distressed Properties

Now, while the benefits of flipping distressed properties sound exciting, there are certain risks you’ll need to consider before committing to one. Here’s a chart to help you see the full picture:

The benefits are great, but the risks are inevitable. By anticipating the potential issues that sometimes arise with distressed properties, you’ll be ready to handle high-risk, high-reward fix-and-flip projects without a hitch.

Ways to Find Distressed Properties

You won’t find “distressed property” a common label in the real estate industry. Instead, you’ll need to think more strategically about how to find situations that will have motivated sellers. 

Thankfully, there are several ways to seek out distressed properties. Here are some of them:

  • Drive For Dollars: Select a neighborhood and look for homes with obvious signs of neglect. These can be signs like multiple notices on the front door, peeling and faded paint, an unkempt yard, broken windows, or uncollected mail.
  • Access the Multiple Listing Service (MLS): If you can find a way to access the MLS (say, if you have a real estate license or a friend who can help you), you can find distressed properties with remarks like,  “handyman special” or “fixer upper”. The longer the property stays in the MLS, the higher the motivation of the seller.
  • Find Foreclosed Properties (REOs): Peruse REO and bank-owned properties to find good opportunities. Lenders and banks aren’t in the business of keeping properties, and want to get rid of these non-performing assets as soon as possible. They will likely sell the homes to you at a discount.
  • Identify Homes with Delinquent Mortgage Payments: You can find public records of delinquent mortgages at your local courthouses. Individuals who can’t pay their mortgage are likely willing to sell their home to avoid foreclosure. 

You can also try to find motivated sellers with delinquent property taxes, as they’re likely behind on mortgage payments as well.

  • Consider Probate Options: You can visit the probate court to find properties left behind by situations such as divorce or death in the family. In some cases, the family left behind might not want the home. That said, keep in mind that you’ll need a special process to make an offer, since the property will be sold through an executor or attorney.
  • Get in Touch with Out-Of-State (OOS) Owners: Whatever the reason is for them moving to another state, some homeowners struggle to maintain the properties they can’t visit often. The result is distressed properties with highly motivated sellers. You can identify these people through direct mail or networking.
  • Check City Records for Code Enforcement Tickets: A property getting numerous tickets for neglect is a sign of an owner not taking care of their property and may be interested in selling.

Conclusion

Distressed properties are the perfect choice for house flippers since your goal is to acquire undervalued properties with the highest flipping profit. By buying valuable properties at a low price point, you’ll set yourself up to gain a large margin for a profitable fix-and-flip project.

What is your experience with buying distressed properties? Do you have any tips on successfully flipping them for a high profit?

Image courtesy of Malte Luk

Categories
Flipping

Top 5 Mistakes Novice Flippers Overlook (And How to Overcome Them!)

Reality TV shows may paint a picture of how easy it is to flip a property, but the actual reality is much more complicated than that. Unfortunately, beginner real estate investors often jump into the business without knowing anything about real estate and how it works!

In a nutshell, house flipping is buying a distressed property that you repair and sell for a profit. It’s one of the best ways to earn money from real estate, whether you do it full-time or only as a side hustle. In fact, flippers can make up to $25,000 profit on a typical house in the City of Detroit (provided, of course, that you follow the right advice). 

But like any business, house flipping takes knowledge, planning, and hard work to be successful. Without the proper guidance, you’ll only lose your hard-earned cash. 

So, here are five common mistakes that novices overlook and how you can avoid them altogether.

#1 No Market Knowledge

There’s more to house flipping than what you may know. One of the biggest mistakes new flippers make is buying a property that falls within their budget but is unfortunately located in an undesirable market. As a result, they end up stuck with a home they don’t need, with all their savings tied to an undesirable property.

Solution: Work with an experienced, local real estate agent who knows the real estate market well and can show you the ropes. Experienced agents will know things such as current market prices, what buyers are looking for, and the latest trends in the neighborhood. Then, continue learning by talking to other investors and following real estate investment blogs (like this one!).

#2 Investing Too Much Time and Money

The whole point of house flipping is to earn a good return on investment. But that is impossible if you spend too much money upfront. Moreover, time is also of great essence in the flipping business. On average, it shouldn’t take you longer than 1-2 months to sell it. The longer a property stays on the market, the more you have to pay taxes and maintenance. This increases your capital expenditure and squashes your potential flipping profit.

Solution: Follow the industry’s 70% Rule, which says you should only pay a maximum of 70% property value minus the repairs. This rule is significant for new investors who don’t have extra money to cover a project that goes sour.

For example, let’s say the property value is $200,000 after $10,000 of repairs. In this situation, you should spend no more than $133,000 to purchase the home ($200,000 – $10,000 x .70 = $133,000). If you spend too much money, you won’t be able to sell it for a significant profit.

On top of this, ensure that you work with a professional contractor before you purchase the property. They can inspect the home for you and provide an accurate repair cost for your budget.

#3 Overestimating Your Skill and Knowledge

Are you tempted to save money and repair the distressed property yourself? Keep in mind that so many things can go wrong if you don’t have the necessary knowledge and experience. It only takes one bad swing of the hammer to do irreversible damages to the home!

Solution: Start slow and look for homes that require minimal repairs (remember the 70% rule). You can gradually take up more complicated projects as you increase your knowledge and experience. Alternatively, work with a licensed contractor to flip the home for you so you won’t have to update the wiring and plumbing on a 60-year-old house.

#4 Miscalculating Cost of Repair

This is the most common mistake! 

One thing that most of the flipping & improvement shows get right is the “unexpected repair”. The demo crew opens a wall that exposes dry rot, termites, a major plumbing issue, etc. 

Miscalculating the cost of repairs can make your expected profits disappear. 

Solution: Look for projects that don’t require much work and talk to a trusted contractor to help you bring the home up to suitable standards. Also, build in 10-20% Cost Overrun in your repair budget. Don’t go overboard!

#5 Overvaluing the House

Finally, one of the classic rookie mistakes is estimating your sales price at the highest price possible. While this does happen, and it’s great when it does, you’re better off being a bit more conservative on your estimated sales price. 

Solution: Consult your real estate agent to land on a realistic price based on market analysis and careful consideration of the competition.  

Conclusion 

Home flipping is still a lucrative gig, provided that you are willing to invest the time and effort. While the concept is as simple as selling for a profit as fast as you can, there are so many pitfalls that can derail your efforts and put you in a financially difficult spot. 

Instead, learn from the mistakes of others! Avoid the top five mistakes novice flippers make to become successful flippers without burning cash.

Need more help in flipping houses? Feel free to get in touch. I’m more than willing to help you in your journey to become a successful house flipper.

Image courtesy of Sebastian Herrmann