Is Flipping Properties Still a Moneymaking Enterprise?
I received a call a few weeks ago from a long lost friend on the east cost; she had taken a weekend long real estate course and was now ready to invest her entire life savings flipping property. That is, she learned in the class that you could buy all sorts of foreclosed properties in California, rehab them, and make boatloads of money in the process.
While it’s true that investor flips are alive and well in certain parts of the United States, purchasing a short sale in order to rehab and sell it again is not always as easy as it seems.
Purchasing a Short Sale to Flip
Here are three things that you need to be prepared for if you plan to purchase a short sale as a flip:
- No Repairs Paid by the Short Sale Lender. When purchasing a short sale, the short sale lender likes to sell the property as-is. That is, the lenders generally do not like to credit any money for required repairs, such as a new roof or septic troubles. And, often times, they will not agree to reduce the property below market value in order to address major defects to the property. It’s unfortunate to make an offer on a property only to learn months down the road that the seller’s lender has not agreed to your terms.
- Short Sale Addenda May Restrict Resale. Many short sale lenders have affidavits with specific guidelines for short sale approval. These affidavits or addenda require the signatures of both buyers and sellers, and often restrict the time periods for when the buyer is permitted to resell the property. So, if an investor buyer purchases a flip, he (or she) may be required to hold the property for 90 days or more—thus impacting the investor buyer’s financial bottom line.
- Terms Not Ratified by Lender. One of the biggest frustrations with short sales is the unknown. The listing agent and seller list the property and obtain an offer, which may (or may not) be ratified by the short sale lender. The short sale lender may not agree to many of the terms and conditions of the offer. And, for investor buyers, each change to the offer can impact the buyer’s financial bottom line. Investor buyers of short sales need to be prepared for the long wait time and the “no” that may come at the end of that long wait. If you can handle that, you may be in for a few good deals.
Short sales are often a great buy. They’re frequently in better condition then bank-owned or otherwise abandoned property because the seller generally resides in many of these properties all the way through to the closing day. That being said, investor buyers that plan to purchase and resell in order to make big bucks may be in for a rude awakening.
The process is not as easy and fruitful as it may seem; the days of purchases at 50 cents on the dollar are likely a thing of the past.
