Flipping Homes - A Profitable Business!

Flipping homes is turning out to be a  profitable business again according to Washington Post.  Research firm Realty Trac has reported 100,000 flipped homes during the first half of 2012, a 25% increase from the same period in year 2011.  Gross profit averaged almost $30,000 per property.

House flipping is not as easy as it seems. According to Mike LaCava, founder of House Flipping School, "You gotta be careful, really do your research and know what you're doing". Because choosing a property in wrong location, or spending too much on repairs, or choosing the wrong general contractor can cost you a lot of money or worst, a property that nobody wants.

Here are some tips on how to have a successful "flip":

1. Find a home with potential. House flippers usually find deteriorated properties in auctions or through other realtors.

2. Do your calculations. Flippers can only earn a profit when the selling price is higher than the original purchase price + repairs.  It's smart to add 10% buffer for miscellaneous costs, which may include attorney fees, taxes and commissions. Make sure to make a research on the market rate of the house within the location of the property. An accurate prediction of the repair costs is also very important!

3. Ask for professional help. If you do not any experience in making a house repair, it's better to seek the help of an expert. You might end up with a bigger costs if you attempt to do it yourself and besides it will be much faster if you ask a professional. Remember, flipping means disposing your property at the quickest possible time at a higher profit. Ask your Realtor for a list of professionals who can help you make the repair.  They can also help you calculate the after repair value of your property.

4. Design for buyers. Keep your colors neutral.  Installing a higher-quality cabinets, or a built-in wine cooler can make your home stand out from the others.

5. Make sure that your home is ready before putting it on the market. Wait until all the repairs are completed before putting the property up for sale. If you put it in the market too soon, then you will be getting design requests from buyers who have not closed on the property yet.

6. Get a pre-qualified buyer. Make sure that your potential buyer is qualified to purchase the property.  If he/she is not yet qualified, the buying process may take longer and you will incur higher carrying costs eating up your profit.

It's best to consult with your realtor to help you in the entire " house flipping" process. Your realtor will make sure that you get the best deal in the market.  

Fiscal Cliff Impacts on Housing

With 3 weeks left in the year 2012, the government has yet to reach an agreement to avoid the negative effects of the so-called "fiscal cliff". Without a fiscal cliff barrier, households might have to pay thousands of dollars extra taxes.

According to Investopedia, "fiscal cliff" means a combination of expiring tax cuts and across-the board government spending cuts scheduled to become effective by December 31, 2012. 

In 2010, the government has extended the George W Bush era tax cuts for 2 years. It means that tax breaks on income, capital gains, dividends and estates will come to an end by 31st of December this year. If you remember, in 2011, the government has set up $1.2 trillion in spending cuts to occur within a span of 9 years, starting January 2013.  Last year, they extended a two percentage point reduction in the payroll tax until December 31.

If the fiscal cliff proceeds as planned, there will be a MAJOR impact on our rather already shaky economy which might include going back to official recession; cut in household incomes; increased in unemployment rates and decreased in consumer and investor confidence. 

Lawrence Yun, chief economist of the National Association of Realtors (NAR) says, "If the cliff was to be realized come January 1st and we do go into a recession, job losses could hamper the housing recovery."  "The stability of people's jobs does impact their confidence to spend moving forward," adds Mark Cole, executive vice president of CredAbility, an Atlanta, Ga.-based non-profit that offers credit and housing counseling services. Cole says American families are hesitant about taking on a new debt. They would rather choose home rentals over home purchases. There will be a continuous growth on the booming rental market if the government will fail to find a resolution on the "fiscal cliff". According to NAR, rents are expected to increase an average of 4% in 2013.

Barry Hersh, a professor at New York University's Schack Institute of Real Estate notes that the commercial real estate will also suffer, since retail and office space are directly impacted by the consumer's spending.

Republicans want to cut spending to avoid raising taxes, while Democrats want a combination of tax cuts and tax increases.  Both have agreed that any resolution will include increased revenue but they disagree on where the revenue will come from.

In a Bloomberg article dated December 4, 2012, President Obama wants $1.6 trillion in tax increases over the next decade. He has proposed $600 billion in spending cuts, about $350 billion of which would come from health-care programs. He also counts the $1 trillion in spending cuts Congress passed in 2011, $800 billion in savings from winding down the wars in Iraq and Afghanistan and $600 billion in interest savings, according to senior administration officials. Leaving aside the administration’s call for measures to boost short-term economic growth, which could take the form of tax cuts or spending increases, this would result in $2.4 trillion in spending cuts and $1.6 trillion in higher taxes.

Without the resolution, short-term fiscal cliff impact on the economy will be avoided. The policies from 2012 will be continued. The extension of Bush-era tax cuts will still take effect; the automatic spending cuts will be revoked; the Medicare reimbursement rates will be kept at the current rate.  However, the public debt rises from 69% in 2011 to 100% by year 2021. 

Waiver for "90-day Anti-Flipping" Rule Extended Until 2014

FHA has extended the temporary waiver for "90-day anti-flipping" rule until 2014.

In 2003, FHA had imposed the 90-day standard holding rule for properties to avoid fraud by teams of mortgage loan officers, realtors, and appraisers. The flips (or selling the properties in less than 90 days for a profit) resulted to significant losses to FHA's insurance fund. 

Starting 2010, FHA has waived the "90-day anti-flipping" rule and has been extending it annually since 2011. For this year, the agency has opted for 2-years extension. FHA says that they have made the 2-year term extension in order "to provide greater levels of certainty" for the lenders and buyers.  The waiver will allow the sellers to resell their properties quicker.  FHA firmly believes that the waiver will result to stability in real estate prices. According to FHA records, the agency has successfully insured mortgages on 62,250 homes worth $11 billion, where the seller had held the property for less than 90 days.

Among the key requirements that will continue during the latest waiver: (Source: fha.gov)

All transactions must be arm's-length, with no identity interest between the buyer and seller or other participants. Lenders are required to ensure that the seller actually holds title to the property. (In earlier flipping schemes, buy-sell transactions sometimes moved so fast that the seller never acquired legal title.) There should be no "pattern" of previous flips of the property during the 12 months preceding the transaction.

In cases where the sales price of the resold property is more than 20 percent more than what the seller paid for it, there must be documentation showing the renovations and repairs that justify the markedly higher resale price. A second appraisal may be used to substantiate the increase in value, but the second appraiser must be selected from FHA's roster. When no significant renovations occur and the price is 20 percent higher than acquisition, the appraiser must provide "appropriate explanation" for the sudden increase.

Inspections are required of all the key components of the building structure and systems when price jumps exceed 20 percent. The inspection report must be provided to the purchaser before closing. If the inspection reveals structural or "health and safety" defects, repairs must be completed before the closing and a final inspection performed to ensure that the repairs have been made.

The new extension of the "90-day anti-flipping" rule will definitely benefit the single-family investors! This is because the longer a home is held, the more expensive it is to the investor, so investors aim to sell the properties at the shortest possible time.  If you are interested in investing in real estate, please visit www.anchoragehomedeals.com.