What is the risk of a house flip?

Flipping homes in any market is flawed – and potentially risky. Once you open a house, well, almost anything can happen. Even with an inspection (which you absolutely should have), you can uncover old problems that were never properly fixed, run into cost overruns when material shortages catch you off guard, or even find out you have a home. that you cannot make a profit on.

In the real estate industry, we all know anything can be sold, but “for how much? Is the question. When moving to another home, it is very important to understand the market in which your home is located, as well as potential future buyers. Unlike other types of assets, a house is something that everyone really needs, but it’s a lot harder to liquidate than, say, a portfolio of stocks. The level of risk you are willing to take should be based on the hyperlocal market and the time frame in which your project is located.

Return to today’s market

For most pinball machines active right now, the only real risk they face is to explode their budgets, as there is still a massive housing shortage nationwide. The October report on existing home sales from the National Association of Realtors showed that the number of existing unsold homes (which is the classification into which a flip falls) continues to decline. Year over year, inventories fell 12% to just 2.4 months of housing.

At the same time, sales of existing homes rose 0.8% from September to October 2021, despite insufficient inventory, it seems, for a wide range of buyers. On top of that, the few homes available are selling for more – prices are up 13.1% year over year, to a nationwide median price of $ 353,900.

In today’s market, flipping (provided you do a quality job and fix structural and mechanical issues rather than just paint a house and call it good) is almost risk-free. That’s not to say you can’t get stuck with a home, but it would definitely be unusual in this particular market.

Situations that create undue risk

As a pinball machine, it’s important to know your market all the way to the block. Check out all the homes you can, see what they look like inside and out, and really get to know what people expect from the neighborhood. The two biggest mistakes I’ve seen people make when flipping are overbuilding and underbuilding, and both are very easy to do.

If your flip house is in a neighborhood that demands excellence, respond appropriately. Spend the extra money on the right accessories, and your buyer will show up and your home will appraise the right way. If your neighborhood needs more affordable housing, use simple but durable materials that will last a long time but don’t have to be expensive. That means forgoing marble countertops in a neighborhood full of Formica. There’s no sin in Formica – there’s a lot of this stuff still in excellent condition (and in use!) From the 1960s.

The other big mistake I’ve seen in house flipping is one that HGTV almost prepares people with little construction experience to do: you can’t just dress a house and call it right. You have to lead with the unsexy things: structural flaws, roof, HVAC, plumbing, etc. Once everything is correct, you can then paint the walls, sand the wood floors and install new light fixtures.

When you can’t sell your flip house

If you create a home that is not only attractive, but healthy, you will have almost no risk because the worst case scenario is that you now have a long term rental. According to the US Census Bureau, in the third quarter, rental vacancy rates for 2021 are lower than ever, at a national average of 5.8%, 0.6% below the previous low in the third quarter of 2020. On top of that, the median rent for vacant units was $ 1,203.

Of course, vacant homes and rental rates vary widely depending on the location of your home, down to the neighborhood. But if you plan your flip so that you can still get away with it if you have to rent it, you’ll have an exit strategy that will make sure you don’t really risk anything. As real estate continues to appreciate, the benefits also increase: the value of your flip will increase, you will get stable rental income, you will have some pretty good tax deductions and when you are ready you can try to resell it. , if you have decided that you still want to unload it.

Flips are wonderful when done correctly, as they are generally low risk investments by their very nature. People always need housing, and in a tight market like this, people need housing more than ever, both to buy and to rent. Your options are almost limitless, as long as your property makes sense to the neighborhood and the buyer (or tenant) you hope to bring in.