The Risks Of Buying And Flipping Houses

Written by Ashley Henshaw. Posted in Investing

Flipping houses is a term used to describe the process of buying a house and selling it for a profit. Some people never even live in the houses they purchase with the intent to flip. Instead, they usually make some upgrades that will make the house more attractive to buyers and able to be listed at a higher price. Sometimes, flipping involves buying a house in an up-and-coming neighborhood and waiting until the value increases.

Although flipping houses can be very profitable, there are some serious risks involved. It’s important to fully understand these risks before you consider flipping a house yourself. Check out some of the potential pitfalls of house flipping and how to avoid them.

Risk #1: Paying Too Much

The key to flipping a house is getting a great deal to begin with. Some investors pay too much for the house during the initial purchase. This can be intentional (with the assumption that it will increase in value or be fixed up for a major profit) or accidental (not realizing that they are paying too much). In either case, there’s the possibility that the house could sell for little to no profit. That’s why it’s so important to be very careful when purchasing a home with the intent to flip it. Without a good bargain at the outset, the entire process can fall through.

So how can you avoid paying too much? First of all, do your research. You should be well-versed on what other similar homes in the area are priced for and how their value is expected to increase in the coming years. Unless a home is a great bargain right off the bat (as is often the case with a foreclosed home), it may be prudent for prospective buyers to hold off and see if the asking price is lowered. Take these precautionary steps to avoid making the mistake of paying too much for a house you want to flip.

Risk #2: Overspending On Improvements

One of the best ways to make a profit on a flipped house is to make some repairs or improvements. This makes it easy to list the house with a higher asking price once the seller is ready to put it back on the market. However, this can be an extremely tricky thing to do financially. Some house flippers end up spending too much on these repairs and end up barely making a profit (or sometimes no profit at all) when the house sells.

Though this is a significant risk, that doesn’t mean you shouldn’t consider making improvements on a house you want to flip. You should, however, be diligent about making a budget for your repairs and stick to it. Don’t forget to factor in time and labor fees as well. Additionally, you should do some research to find out which types of repairs and inexpensive and increase the value of a house the most.

Risk #3: Not Factoring In Fees

There are so many fees associated with buying and selling a house. For example, the realtor commission alone can be as much as 6%, meaning that you’d have to make $9,000 on a home you’re selling for $150,000 just to break even. Many house flippers overlook these fees and focus instead on the buying price versus. the selling price, leaving them disappointed when they see that their real profits aren’t as high as expected.

To avoid this, simply find out what fees you’ll have to pay and factor those in before you make any purchase. These fees should ultimately help you determine whether a house is “flippable” since they’ll indicate whether the final profit is significant enough to make the investment.

Risk #4: Getting Involved In A Scam

There are two ways a house flipper can get caught up in something illegal. The first is when the buyer is the victim – some people who want to flip a house are so eager to snatch up a property that they buy it remotely only to find out later that they didn’t get what they were expecting. The second is when a house flipper commits fraud by giving the flipped house an artificially invaded value or by making the claim that renovations were made when none actually were. The first scenario leaves the buyer high and dry and with little hope of making any profit. The second scenario could lead to trouble with the law.

To avoid being scammed, always make sure you see a property in person and have it appraised before buying. To avoid getting involved in illegal activity, never get involved with a fraud for profit scheme like the one listed above. Do not associate with any other house flippers who want you to make a cash-out purchase for an illegal flip.

Now that you know the risks of buying and flipping houses, you’re more likely to succeed should you decide to try it for yourself. Just remember that house flipping isn’t an effortless get-rich-quick scheme. It takes time, research, funding and patience to make it work out in your favor.

Ashley Henshaw

Ashley Henshaw

Ashley Henshaw is a freelance writer based in Chicago. She is a graduate of Loyola University Chicago with a bachelor's degree in English. She has previously written about health, fitness, finance and travel topics for sites such as LIVESTRONG.com, USA Today, The Huffington Post, AOL's City's Best, All Things Frugal and Campus Explorer.

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