Rehabbing and Flipping Houses

Chapter 1 

Flipping

Flipping is a word that is mainly used in the United States to illustrate the practice of buying an asset that generates revenue and swiftly reselling it for profit. Although any asset can be flipped, the expression is more frequently used for real estate and initial public offerings (IPOs). Flipping in real estate is used to describe real estate rehabbing and redevelopment of residential houses.

Although flipping is a legal business, some people engage in flipping in a nasty and deceitful manner. Thus, flipping is often used to describe the real estate business schemes that involve market manipulation for profit makes and sometimes to disparage practices which are frequently seen as illegal and unethical.

Real estate flipping

Real estate flippers make their profits either by procuring the properties at lower costs and selling at higher prices in a fast moving market or by purchasing a property that needs rehabbing and renovating it before reselling it. This process is known as fix and flip.

Flippers or investors that engage in fixing and flipping usually buy a property at a price cut. They may get the price cut as a result of the following:

• The property is in bad condition; it requires huge rehab works and the owner is either unwilling or incapable of carrying out the repair himself or herself.

• There is a dire need to sell the property due to the fact that the owner is relocating, has divorced or is facing an imminent foreclosure.

Thus, the flipper procures the property, revamps it and resells it at a profit.

Real estate Wholesaling and transfer of contract

In real estate wholesaling, the wholesaler signs a contract to buy a property from a seller and afterwards enters into an agreement with an intermediary person and resells the same property to the person at a higher price for monetary gain.

The wholesaler usually transfers every right to the original purchase contract to the new buyer who pays an “assignment fee” to obtain all rights to acquire the property at the original purchase price.

The initial acquiring contract typically has an inspection period within which the original buyer can close in on a property. This is essential because majority of people who deal in real estate wholesaling do not actually want to purchase the property. They merely use wholesaling as means of discovering properties for other real estate investors.

Often times, the wholesaler cancels the original purchase contract if he is unable to find a buyer before the expiration of the inspection period through cancellation clause. When this is done, the wholesaler’s deposit is refunded to him.

To make real estate wholesaling deal, you need to pay little or no deposit depending on the agreement you reached with the seller. The deposit can be as little as ten dollars and even then, this could be regained if you cancel the contract before the expiration of the inspection period.

Some people think that real estate wholesaling is fraudulent since most of the wholesalers have no intention of closing in on the property and since most of the sellers are commonly unaware that the buyer has no intention of buying the property. However, it is a completely legal exercise and occasionally wholesalers make real purchase of the property and resell it to another buyer for monetary gain in a second closing. The second closing option is more costly because the buyer pays closing costs to procure the property and then resells it.

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Multiple property wholesaling

This occurs when a property is handed over many times to a few wholesalers who make money in the contract obtained from the original seller and transferred to the end buyer. The first wholesaler contracts the property from the original seller and transfers the right to another investor who procures the property. The second investor resells the property to a third investor and assigns the contract to him and the order continues in this way.

Often times, these wholesalers interrelate to make sure that all parties are paid their commission once a transaction is made. Although this practice is usually frowned upon and considered unethical, it is actually nothing different from wholesaling of other products. The major reason people engage in wholesaling property is due to the fact that they are usually sold below market value by the original owner. This normally happens when the property is in distress like when a property is damaged by fire or other natural disasters. Wholesaling can also occur when the homeowner faces foreclosure and is at risk of losing his home.

The practice of procuring real estate at a price significantly less than the market value is known as Distressed Real Estate Investment or Wholesale Real Estate Investment.

Effects of real estate rehabbing and flipping

It creates economic fizzes

An increase in flipping usually leads to economic fizz.  Low federal borrowing cost often results to increase in for properties’ demand. Due to low interest rates many speculating investors may purchase homes with the intention of selling them when the price improves. When the demand gets higher than supply, they would usually resell the house at a higher price for quick-fix profit.

However, if the interest rate is high, it discourages borrowing and flipping. This results to minimal sell of properties and reduces the market value of the properties. Overtime, this results to a lot of property owners flooding the market with properties at a particular time which in turn results to excess in demand than supply and a boost in the market value.

Rehabbing and flipping results to transformation and gentrification

Legal flipping leads to refurbishment and transformation of dilapidated districts. This is referred to as gentrification which usually boosts property value but results to population relocation.

Gentrification generates new jobs especially in the real estate construction sector and helps local sellers and suppliers to make more money. The rehabbed homes bring new populations and businesses into the district. The home transformation results to better economic development and boost the property tax revenue earning for the government. Overtime, it leads to a better development of the district, improves the regions security and law enforcement.

If flipping regularly occurs in a district, the cost of owning a home can increase greatly and this may overtime force existing homeowners especially the poor ones and the elderly to move.

Increases the Property values

After rehabbing a home, the property condition and worth improves and the market price improves. Homeowners in the neighborhood as well benefit from the home improvement as it leads to a corresponding increase in the worth and market price of their properties.

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