Flipping Foreclosures: Does It Make Financial Sense For You?

Flipping homes is more popular than ever right now, yet returns on these rehabbed homes are at a four year low; Q2 2018 returns offered only a 44.3% return on investment, down from nearly 48% the previous quarter and down from 50% year-over-year. It raises the question, why do investors persist in flipping dilapidated and foreclosed homes? Though earnings may be down, the simple answer is that it’s a new American pastime – it’s how many people express their entrepreneurial spirit and attempt to inch closer to the American dream of prosperity.

Whether you’re considering flipping foreclosed homes as an investment strategy or you’re a property owner and manager who wants to add to your holdings, it’s important to determine if this path makes financial sense. Before you get started, then, take a minute to consider these three questions and get a clearer sense of whether this is the right strategy for your financial future.

How Long Has This Home Been Vacant?

How long a home has been vacant before purchase doesn’t necessarily determine whether or not it’s a good prospect for flipping, but it can tell you many other things about the structure. For example, when a home goes into foreclosure, it may stand empty without heat or air conditioning for months – and depending on local weather and the home’s condition, this can leave the structure vulnerable to mold. Toxic black mold is extremely dangerous and can cause lifelong health problems; it’s also costly to remediate.

Homes that have been vacant for a long time are also more likely to have been vandalized or damaged and are prone to requiring more extensive repairs and updates than those vacated more recently. Squatters may have used the space, it may need new siding or roofing – some foreclosed properties need to be completely stripped and remodeled. Properties that have been out of use for a long time, in other words, can drive down your returns significantly.

Is The Property Structurally Sound?

Following from the first question, it’s also important to consider whether or not a prospective flipping property is structurally sound. According to Houston property management experts Green Residential, the best homes to flip are those that only need cosmetic improvements. That means you should rule out anything that needs new wiring, plumbing, or foundation work should be ruled out of contention.

It’s important to understand that “cosmetic improvements” is actually a broad category that includes replacing drywall, flooring, and countertops, among more mundane features of the home, such as fixtures, landscaping, and appliances. Things that you might not touch during a typical home sale are often standard cosmetic improvements for home flippers.

Where Will You Find Foreclosures?

In order to invest in foreclosed homes, you’ll need to find a great candidate – and this can mean following a different path than you would when buying a typical home. So, yes, you may find foreclosures listed on Zillow or Realtor.com, but you may also want to make use of foreclosure-focused services like RealtyTrac or Hudson and Marshall.

The question of “where” is about more than just sourcing properties, however. Where you’ll find homes in foreclosure is also a question of scope. In other words, if such properties are far away from your current properties, they may be inconvenient to rehab or to manage once they’re rented to new tenants. Or, if they’re surrounded by other homes in foreclosure, the building may not be appealing for sale, so you’ll be left in a holding pattern, unable to sell the property for an extended period, which will put a dent in your long-term earnings.

Though returns are down, flipping the right property can still be highly lucrative; even at only a 43% return, a flip can help you build a meaningful nest egg or provide the financial foundations for other business undertakings. The surest way to make such a return on any flip, though, is by asking the foundational questions above. The less you need to spend on rehabilitating a new property, the easier it is to recoup those costs down the line.

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