Common Risks Faced by Property “Flippers”
Property foreclosures are at an all-time high. The thought of procuring a property for pennies on the dollar is a lure that many cannot resist, particularly when with a little fixing, can turn a nice profit. Unfortunately, there are inherent risks that come with investing money in a property, fixing it up, then trying to turn a profit in a short amount of time.
The upside to buying a foreclosed home is getting a property at a lower price. The risk becomes in after the rehab – convincing buyers to pay top dollar when there are better bargains down the road. The massive profits that most investors seek cannot be accomplished if the property cannot be purchased, rehabbed, and sold quickly.
One of the biggest risks in flipping any property is the time and money it takes to rehab and sell it. Here is where researching the market is important. Some areas sell rather quickly. Other areas may take months. Knowing the market is important to know prior to investing. Even with the research done, flipping a property might take longer than anticipated. In these situations, the investor has a series of options available. Renting, leasing to own, and lowering the asking price are all options available, but also cuts into the profits anticipated. Be prepared to take a loss if necessary
Another risk would be the risk of seriously underestimating the amount of money that will be required in order to do the necessary work. This is something that many first time investors find is a fairly common occurrence. Most people have unrealistic expectations of exactly how far their dollars will go when it comes to investing in the materials and labor needed to properly rehab a property. Even minor cosmetic repairs throughout a house can easily run into several thousands of dollars in order to repair. The positive side is that once these repairs are made the potential profits can run into several tens of thousands of dollars.
Another risk that isn’t often considered is the risk of overestimating personal abilities. Not only is material wasted in the process of discovering that the investor isn’t exactly skilled in any particular tasks but also there are further expenses involved in hiring the professional to repair the damage and replace the material that were wasted. When in doubt, it is almost always best to hire a professional if at all possible. Overestimating abilities will leads to missing deadlines, going seriously off schedule, and adding yet another mortgage payment (if not more than one) to the overall price of the project.
The final risk is often something that simply cannot be seen or anticipated. Markets may crash and local economies can be devastated by the announcement of a major employer that it is going out of business. In these instances, the market will take quite a while to recover and ‘flippers’ among other investors stand to lose money through no fault of their own.
Investing in real estate carries much of the same risks that any investment carries. The trick is in deciding which risks are acceptable.