Aside from being pun-friendly fodder for reality TV naming execs in recent years, "flipping" can be a rewarding – albeit risky – practice, if you do it right. The doing it right, of course, is a complex process, but one, realtors say, could be worth trying.
According to real estate data provider RealtyTrac, a property is defined as flipped if it's sold at a discounted price, then resold for market value (suggesting some kind of improvements were made to the property), typically within 90 days (Chicago's 2012 average was 114 days). That original discounted price is generally related to the property being distressed— a foreclosure, short sale, estate sale, perhaps a death or divorce; something that's keeping the place from being listed at full market price.
Chicago saw 1,067 homes flipped (by RealtyTrac's definition) during the first six months of last year, a 30 percent increase from the year before. Purchase prices are creeping up again after the economic mess of the last few years, but there's still plenty of opportunity for investors as those prices remain at levels we haven't seen for a decade, the Chicago Tribune reported in October.
What You're Looking For
Marki Lemons-Ryhal, a managing broker and Chicago real estate educator, says the idea in a place like Chicago is to find a community with two markets in one, meaning there's inventory at a distressed price point and an after-repair price point that give you a decent spread of equity, or difference between the values of 'before' and 'after' properties.
Foreclosures, or mortgaged properties that have been seized by a bank or other lender because of defaulted payments, have been on the rise over the last few years, giving potential flippers a lot of distressed housing stock at cheaper prices, but numbers released in RealtyTrac's year-end Foreclosure Market Report actually showed December foreclosure rates declining. Which isn't to say you'll have trouble finding a foreclosed property— Chicago was ranked the ninth highest metro area for foreclosures in 2012 according to RealtyTrac, and Illinois has one of the longest foreclosure processes of any state. "There is light at the end of the tunnel but we still have a lot of inventory to go through," Lemons-Ryhal says.
Another consideration? Converting a property to a type that might earn you a higher return. For example: You might find a distressed Bronzeville two-flat for $50,000, put $150,000 into converting the place to a single-family home, and voila: an after repair value of $400,000 since single-family homes sell for more in that area.
What You Want to Gain
A Chicago Magazine article published last January recommended adding your purchase price to the amount it will take to spiff up the place. Generally, when flipping you want to aim for that total to be at least 20 percent less than the current price point to make the project worth your while.
"If you can make more than the bank after your costs, then you're doing well," Lemons-Ryhal says.
The flipping market itself hasn't necessarily changed with the economy but the amount that buyers should plan to invest in the properties has gone up. With the buyer's market recently, higher-end amenities are needed more than they might have been 10 years ago to keep a property from sitting on the market.
What Not to Do
Beware of illegal flipping schemes. If it sounds too good to be true, it probably is. The Department of Housing and Urban Development even instated an anti-flip rule in 2003 prohibiting the use of FHA-insured financing for properties that had been resold within the past 90 days to curb mortgage and appraisal fraud flipping— though the department waived the rule in December for the fourth time since 2010 to cut local markets some needed slack.
Only work with reputable agents and companies backed by the Better Business Bureau. A good rule of thumb: If you can't find any information about an agent or agency, steer clear. Lemons-Ryhal also cautions against condo flipping for beginners. Because of complex condo rules and regulations, your best bet is to focus on single-family homes, then multi-family residences. Baby steps, people.
Where to Start
Flipping houses is a business. Many investors keep their tricks of the trade close to the vest but there are still resources to turn to so your flip won't flop. Bone up on local laws. States, cities, and counties all abide by different rules. Align yourself with experienced realtors and contractors; find out what kinds of properties your alderman is looking for as they have the power to block permits; utilize local Meetup.com events focused on flipping and real estate investing. Attend free workshops at Home Depot or Lowes to get an idea of the kind of work you'll need to put into your properties.
If you're successful, flipping can pay off not only financially but also with improved project management skills, and a sense of accomplishment and community investment, realtors say. So if you think you're up for the challenge, go ahead – flip out.