Flipping Houses - Four Strategies

Different investors have different ideas about flipping houses for a profit. Simply buying cheap and selling for more is the one of four strategies discussed below. It is the least likely to work in today's market (this is being written in 2009), so we'll get it out of the way first.

1. The Straight Buy and Sell

The strategy here is to buy low and sell the house for more. Improvements and repairs are minor or just not done. Several years ago this was actually a common plan in many areas. Of course those were the days when real estate was appreciating by 20% annually in many cities.

That fast price appreciation helps because you don't add much value to the property doing this. In fact, you have to make your profit by buying below market, often relying on the ignorance of sellers. As you can imagine, this type of "investing" isn't always appreciated by the public. It's also difficult because the transaction costs of buying and selling can eat up 10% to 15% of the final sales price. In todays market this means that if you find a house for 20% less than what it's worth, you might only make a small profit - and then only if you sell it before holding costs eat up that margin.

2. Contract Flipping

Flipping houses by selling the contracts was another common practice a few years ago. The basic strategy is to make an offer, then sell your position to another investor. Suppose a home has a potential $30,000 profit after repairs, based on the offer that you made and had accepted by the seller. You then sell the contract to another investor who does the repairs. Perhaps you make $5,000 and he still can make $25,000 - but you risk almost nothing if you do this the right way. You also need no cash to invest other than perhaps $500 for earnest money (also called a "good faith deposit"). You just have to be sure that you leave yourself a way out in the contract and have the right to assign it to another investor.

3. Flipping Fixer Uppers Using Sweat Equity

Probably most people think of this strategy when contemplating flipping houses. Find a run-down home, buy it cheap, and then spend all your free time painting, repairing and landscaping. Hopefully you are done in four months, sell the place a few months later, and make $25,000 for your efforts.

For a first time investment this can be a valuable experience. Doing everything yourself teaches you the costs of repairs and improvements, as well as the process. This is also a way to  reduce your risk. Maybe you end up making only $7,000, and you would have lost money had you paid out $12,000 for others to do the work.

On the other hand, if you only made $7,000, you may have netted less for your labor than a pizza delivery driver, meaning you bought a job, not an investment. You generally don't make big money by doing everything yourself. Once you have some experience, you should consider flipping fixer uppers using a more business-like approach.

4. Flipping Houses As A Business

A friend who invested in fixer uppers  bought and sold fourteen houses one year. Naturally he never lifted a hammer or paintbrush - who could handle more than a couple homes doing the work themselves? I know for a fact that he made less per house, on average, than some others who were flipping houses, but he certainly made more money total on 14 houses than a do-it-yourselfer could make on the two or three per year they might manage to complete. With a good team of contractors and others busy preparing one house, this investor could spend his time finding the next good buy. Delegate - that's how you make it a business.