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Mark Twain famously said “buy land, they’re not making it anymore.” This sentiment has been the driving force behind people that wish to flip a home for a profit. While it can be a good way to earn money on an investment, there are also some items to consider in order to avoid losing money.
Getting the right property, correctly estimating costs and sales price, and lining up the money are all vital to making sure this kind of investment is profitable.
For people that want to flip a home, it is very important to understand that buying a home at a price which will allow a profit is the most important factor. Paying too much to acquire the property is a common error made by new investors.
Homes that are typically ripe for flipping are normally foreclosed homes. These homes are owned by banks and other financial institutions that need to cut their losses. Some of these financial organizations will not be willing to accept a lower price because they have already lost money due to missed payments, legal fees and property maintenance expenses. These kinds of organizations should be avoided.
Instead, look for homes that are advertised with phrases like “willing to negotiate,” “all offers considered,” “need to sell” or other similar expressions. This indicates a current owner or bank that is tired of holding on to the home and wants to sell.
Learn what steps to take when buying a house in this short 3 minute video.
Buyers need to look at 3 things; initial purchase price, renovation or repair costs, expected sales price.
It goes without saying; the purchase price needs to be as low as possible. If the home has been foreclosed, the current bank or lender may be willing to negotiate a lower price than the advertised sale amount. If the current owners are simply holding on to the property in hopes of getting full price, it may be a waste of time to try and get a better price.
The repair and renovation costs can be tricky. A buyer should make sure that the contract allows for a thorough inspection prior to closing on the deal. This will allow the buyer the chance to hire an inspector and determine exactly what is wrong with the home and get bids on the repairs. Overestimating the repairs and renovations can also insure that the deal will still be profitable.
Finally, the expected sales price needs to be realistic. In order to get an idea of a good price, it would be a good idea to contact an experienced real estate agent that has worked extensively in the area. The agent can look at sales price of other homes and provide an accurate expectation of the home’s potential sales price.
Acquiring the money needed to buy the home and pay for the repairs can come in 3 forms; two traditional loans from a bank, an FHA 203k loan or a Homestyle Renovation loan.
The traditional loans from a bank involve getting one loan to buy the home and a 2nd loan that is a construction or renovation loan. This type of arrangement will require the borrower to make payments on the first loan while the repairs are made. Once the repair and renovations are complete the buyer will need to make payments on both loans while looking for a buyer.
An FHA 203K loan is a bit simpler in nature compared to the previous scenario. The 203k program is a special loan that will allow a borrower to get enough funds to purchase a home as well as make needed repairs all with one mortgage. The payments are not required until the repairs are finished. In addition, the same lenient credit score rules and low down payment guidelines that are common with FHA loans are in effect with the 203k loan.
The 203K program comes in two varieties. The limited version of the 203k will allow basic repairs such as replacing the cooling & heating system, replacing the roof and gutters, adding new windows and doors, repairing or replacing the flooring.
The other version, called the standard 203K mortgage, allows the borrower to make much more extensive modifications. Things like structural changes, adding a room or even rebuilding a home that is demolished. This type of loan requires the involvement of a licensed contractor. The contractor can look over the home at time of purchase, get details about the proposed repairs or additions, and provide a full cost markup. With this information, an appraiser can determine the expected value of the home after the repairs are finished.
It is important to note that with the 203K program, the buyer must occupy the property as their main home. In other words, the buyer cannot have other mortgages.
Fannie Mae also offers a similar loan called the Homestyle Renovation program. Since it is a conventional loan, the credit score requirements and down payment rules are slightly higher than the FHA program.
The Homestyle program will allow borrowers a full 12 months to finish the repair and improvement work. The price of the work done to the property can be as much as 50% of the home’s expected value.
To determine the maximum amount of the loan, Fannie Mae states that the loan can be 95% of the smaller of:
For example, an appraiser looks at the plans and estimates from the contractor and determines that the home in question will be worth $300,000 when repairs are complete. The purchase price of the home is $180,000. This means that $90,000 can be used towards renovations and repairs.
However, the $90,000 plus the $180,000 only equals $270,000. So, the borrower will only be allowed to get a loan equal to 95% of the $270,000.
Unlike the FHA 203K program, Fannie Mae will approve loans for investors. This can be an added benefit for someone that already has a mortgage on their primary home.
With a realistic approach, and good financing, buying a home to later flip it is a viable way to make profits in real estate. It simply takes good planning and working with knowledgeable mortgage lenders and experienced contractors that can provide the right guidance for an investor.
About The Author: This article “How to Purchase and Renovate a Fixer-Upper” was written by Luke Skar of Inlanta Mortgage – Madison which serves Wisconsin, Illinois, Minnesota and Florida. Since 1993 Inlanta Mortgage has provided award winning customer service to clients who need to purchase a home or refinance an existing mortgage.
Luke serves as the Social Media Strategist for Inlanta Mortgage. His role is to provide original content for all of their social media profiles as well as generating new leads from his website, MadisonMortgageGuys.com NMLS ID #1016
About Rochester’s Real Estate Blog: Rochester’s Real Estate Blog is owned and operated by Kyle Hiscock of the Hiscock Sold Team at RE/MAX Realty Group. With over 30 years combined experience, if you’re thinking of selling or buying, we’d love to share our knowledge and expertise.
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