Real estate investing has a vocabulary all its own and the novice flipper will come across terms that are specific to the fix and flip investor. If you aren’t familiar with the definitions of these 5 vocabulary words before you flip a property, you may bite off more than you chew, pay more for a home than is necessary, or overspend on repairs.
#1: Distressed Properties
The first place to look for potential flips is among distressed properties. Realtor.com defines distressed properties as “… homes whose owners cannot maintain them. Either these properties suffer from neglect and are in poor condition, or they are at risk of foreclosure due to non-payment of mortgage and/or taxes.”
Distressed properties also include homes in probate, REO (real estate owned) properties that are owned by a bank, and short sales. You can search local auctions for properties, check the probate records in your local recorder’s office, or search online for properties in foreclosure.
#2: Short Sale
Short sales are homes that are being sold by the owner in order to pay back to the bank what is owed on the house.
Typically, if you see an incredible listing price for a short sale, keep in mind that it is just the opening bid and short sales can be tricky to snatch up. If this is your first flip and you are doing it alone without an agent, it’s best to avoid short sales.
Once you’ve found a property that you want to flip, before you go forward, you’ll need to compare it to other homes in the area. You do this using online sites like Zillow.com and Trulia.com or comps provided by real estate agents using the Multiple Listing Service (MLS) to determine the best purchase and sales price for the home. You can’t eyeball a property and think, ‘Well this one looks like that one.’
Comps compare similarities as well as differences. A home with an in-ground swimming pool could increase the value of a potential flip. The location of a property could make a similar home in the same neighborhood worth more or less in the eyes of prospective buyers.
#4: After Repair Value (ARV):
All flippers must understand ARV. The After Repair Value will tell you whether or not it is worth buying a particular home to flip. In order to get to the ARV, you’ll need to walk through the home with a professional contractor to determine what repairs are needed.
After you’ve estimated the cost of repairs versus the estimated asking price, you can determine the value of your flip. Will you break even, make a profit, or lose money on the deal? Determining the ARV will help you answer to that question.
#5: Holding Costs:
Finally, when you flip a property, it doesn’t mean that you’ll find a buyer as soon as the last repair is made. Like any home sale, it can take time before the home is sold. Remember as the flipper, you own the home for as long as it is on the market.
You will be responsible for what are called “holding costs.” Holding costs include maintaining insurance, paying HOA fees and utilities, and paying the monthly interest on a loan if you financed the flip.