I can hear it now.. "After all these post's about how lucrative house flipping can be, now your saying it is a bad idea?"
You guys probably know my thoughts by now in regards to the business of flipping houses.
Yes, it can be very lucrative.
Yes, it is rewarding.
Yes, it is good way to make a living.
And yes, it is a good stepping stone to becoming wealthy.
However, flipping houses is not always roses and butterfingers. (yes, butterfingers are my favorite candy)
Throughout the course of a flip, there are a number of things the can go wrong that may not have expected. Some of these things are:
Change Orders
Under Estimating Repairs
Under Estimating Budget
Going Over Schedule
Miscommunication With Attorneys, Insurance Agents, Homeowners Etc
Dealing With Contractors
This is a short list of issues that could arise throughout the course of a flip.
The one item that I didn't mention, that I believe is the worst part of this business is...
The process of selling the house.
Let me explain why I think this is the #1 reason flipping houses is a bad idea.
How Long Does It Take To Get My Money?
If you are in the flipping business, you know that it can take quiet some time to actually see your return.
The whole concept behind flipping houses is producing a quality product in a timely manner.
A typical rehab can take you anywhere from 3-6 weeks, 8 weeks on the high side.
Most people think that you:
Purchase the property
Rehab It
Find a Buyer and the next day it is sold
This would make the process from purchase to sale about 2 months.
However, this is far from the truth.
The #1 reason that flipping house's is a bad idea is due to the sales process.
Now, I am not talking about actually finding a buyer for your newly renovated property. That part is fairly easy, depending on where your business is located.
What I am talking about is the process after the new buyer has put an offer in and all the paper work has been signed. The process from going under contract to actually closing on the property is the worst part about flipping houses. When the buyer of your property is using bank financing, which 99% of the buyers in our area will be using. This process can take anywhere from 6 - 10 weeks.
So Why Is This Process Such A Pain?
The short answer is.. there are way to many people involved and the people that are involved typically work in slow motion.
The main violators of the slow work is the banks. If you have ever bought a house, you know that this process can be a pain.
Once, the buyer's offer has been accepted, there first line of action will be to contact their mortgage person to apply for a mortgage.
These banks have a lot of guidelines and requirements that there borrowers need to meet. This leads to a lot of paperwork that needs to filled out and documented. This can lead to several delays throughout the closing process and even result in your dealing falling through.
The next step of this process, will be the inspection. If you guys have ever been through an inspection from a buyer, you know that no matter how perfect your house is, they will have some type of list for you to repair. This is no problem, obviously, you want to put a great product together for your new buyer.
This just goes back to the amount of people that you will be dealing with in this process.
So your buyer gets their inspection. They come back with a good size list of things they would like done before you close. This list is sent to your real estate agent. The real estate agent reaches out to you. You feel that some of the things on the list are nonsense, so you negotiate. The buyer says, they need them to be fixed. You agree, you have you contractor go make the repairs. You notify your agent the repairs are complete. The agent has to notify the agent to schedule a re-inspection of the property.
As you can see from this one aspect of the process, how many different people are involved and how long just this one little task can take.
One of the next steps in the process that will take some time, is the appraisal. Your lender will require that the property be appraised by a professional, usually provided by the lender. If the home's appraised value is less than the purchase price, you will either need to make a greater down payment or the buyer will negotiate to a lower price. A lender will not provide the buyer with a loan that is greater than the appraised amount.
As we stated, speed is a critical part of flipping a house. Every extra day that you hold the property, your expenses on the property grow. With that being said, if your buyer is getting an FHA loan, you will be required to get a second appraisal on the property if you sell it within 6 months. This is a rule required by the banks where that a second appraisal be done if the seller's purchase price was for less than 50% of the resale amount.
Once all the information has been relayed through all of the officials involved (banks, lenders, attorneys, agents a new Closing Disclosure has been put in tact under the TRID rule. This has the potential to hold up closings an additional 7-10 days.
Wrapping Up
The process of buying and rehabbing can actually be mastered. You can put together systems to minimize this time and streamline these processes. The part of the process that can't be systematized and is out of your control is the process of a property being under contract to closing. With the new regulations, this closing process has only been extended.
Do you guys think that the new powers will give any relief to these laws?
Let us know in the comment section below.
HS Property Funds
Funds to Help, Problems to Solve
(315) 516-8023
www.hspropertyfunds.com