During difficult economic times, the savvy investor can find some exceptionally bargains in the real estate market. Nationwide, real estate agents estimate there are more than 2 million foreclosed homes on the market currently, with up to another 7.5 million homeowners delinquent on mortgage payments or involved in the foreclosure process.
In today's volatile real estate market, many adventurous entrepreneurs engage in the real estate trend known as "flipping" properties for profit. Magazine articles and popular television shows make the whole process appear profitable and fun: and it can be. The recipe is simple: find the right distressed property, in the right neighborhood, at the right price. Next, invest in materials and supplies, put in the sweat equity and then resell the home for a big profit. At first appearance, the statistics reflect an incredible opportunity for handy "do-it-yourself" homebuyers. However, if you are considering purchasing a fixer-upper home to restore and resell, there are some important points to keep in mind.
Clean up your credit score
Purchasing a fixer-upper property can be either a very good investment or a financial disaster. Because of the rash of foreclosures, lending standards are high and mortgage money is tight. In a depressed buying market, the potential homebuyer needs plenty of cash, patience and perseverance.
Before you buy, imagine the worst case scenario: you lay out $75,000 to buy the property, the repairs cost more than you anticipated, you end up spending another $25,000 on materials and supplies for renovations and you juggle the bankbook to pay your own rent or mortgage payment plus the mortgage for this property. Property taxes, permits, insurance and utilities empty your wallet even further, and the house still does not sell. If all goes well, you will make a ton of money, if it does not you could end up in bankruptcy. Do the research, carefully plan your budget and avoid getting ahead of yourself. Make sure you have the financial reserves or line of credit that will allow you to maintain your good credit until the property is "flipped" and the check is in your pocket.
Due to the country's record-breaking rate of foreclosures, money lenders have tightened credit requirements for home loans, especially those targeted for a high risk house flip in a down market.
Cash is required for real estate agent fees, closing costs and a down payment. When you use cash for a down payment on a property to flip, you avoid having to pay private mortgage insurance premiums (PMI) on a second mortgage. If you have an excellent credit rating, you may also wish to consider leveraging the equity in your home by taking out a home equity line of credit (HELOC).
Work with the right real estate agent
You need to work with a real estate agent active and knowledgeable in the local market. When purchasing a property for flipping the goal is to purchase a home in a desirable location, at the best price possible, fix it up, and sell it quickly at a nice profit. A reputable and established Realtor can guide you through the entire process, recommend contractors, secure permits and expedite the process to a profitable conclusion. Choose a real estate agent with a proven track record of quickly selling the properties they list. Listen to their advice and price your property accordingly. The longer the home remains on the market, the more money you lose to monthly maintenance, mortgage payments, insurance, property taxes, and utilities.