Common Risks of Flipping Properties
Flipping properties is a great way to make money in a seller's market. However ,we currently appear to be going through what is known as a buyer's market in the United States. Foreclosures have reached an all time high, which means that the marketplace has suddenly been saturated with properties for sale. There are several common risks of flipping properties you should be aware of.
Even though this is excellent news when it comes to getting hold of a property at a discount, it also creates a hard time of convincing buyers to pay top dollar when you can find far better bargains down the road. This needless to say is one of the major risks involved in the real estate investment venture that is known as flipping properties. The huge profits that most investors seek cannot be accomplished if the property cannot be purchased, rehabbed, and sold quickly.
Unfortunately, at this moment, few properties in any city are selling too terribly quickly. The worst case scenario in a situation like this is that you are forced to either absorb the loss (which can in extreme cases result in serious financial hardship or bankruptcy) or rent the property out (which will in most cases eliminate all the efforts that were made to rehab the property. An inability to sell the property that is being flipped is probably the worst fear of every property investor who engages in this sort of investment. In these cases it is often better to drop the price and take a loss than hold out for a better price risking further losses in the future.
These are not the only real risks associated with flipping properties unfortunately. Another risk could be the risk of severely underestimating the amount of money which is to be required in order to do the necessary work. This is something that many first time investors find is a fairly common occurrence. Most people have unrealistic expectations of exactly how far their dollars will go when it comes to investing in the materials and labor needed to properly rehab a property. Even minor cosmetic repairs throughout a house can easily run into several thousands of dollars in order to repair. The flip side is that once these repairs are made the potential profits run into several tens of thousands of dollars.
Another risk that isn't often considered is the risk of overestimating abilities. This is one risk that costs not only precious time but valuable money as well. Not only is material wasted in the process of discovering you aren't exactly skilled in any particular tasks but also there are further expenses (often unplanned) involved in hiring the professional to repair the damage and replace the material that was wasted. When in doubt, it is almost always best to hire a professional if at all possible. This also leads to missing deadlines, going seriously off schedule, and adding yet another mortgage payment (if not more than one) to the overall price of the project.
The final risk is often something that simply cannot be seen or anticipated. This was experienced in the days immediately following 9-11 and should not be forgotten. The unforeseen happens every day. Markets crash; local economies can be devastated by the announcement of a major employer that it is going out of business (thinks of the collapse of companies such as Enron and World Comm and what they did to local economies). In these instances, the market will take quite a while to recover from the shock to its system and 'flippers' among other investors are often left feeling just as lost and devastated as those that were victimized by these companies-both through no fault of their own.
The things that we have absolutely no control over happen to be the issues that affect us most profoundly. This holds true with regards to property investment. The condition of the economic climate, the real estate market within an area, and unexpected news that affect either can often have the most profound impact on those who are investing in property in those areas whether for better or for worse. The trick is in deciding which risks of flipping properties are acceptable.
Even though this is excellent news when it comes to getting hold of a property at a discount, it also creates a hard time of convincing buyers to pay top dollar when you can find far better bargains down the road. This needless to say is one of the major risks involved in the real estate investment venture that is known as flipping properties. The huge profits that most investors seek cannot be accomplished if the property cannot be purchased, rehabbed, and sold quickly.
Unfortunately, at this moment, few properties in any city are selling too terribly quickly. The worst case scenario in a situation like this is that you are forced to either absorb the loss (which can in extreme cases result in serious financial hardship or bankruptcy) or rent the property out (which will in most cases eliminate all the efforts that were made to rehab the property. An inability to sell the property that is being flipped is probably the worst fear of every property investor who engages in this sort of investment. In these cases it is often better to drop the price and take a loss than hold out for a better price risking further losses in the future.
These are not the only real risks associated with flipping properties unfortunately. Another risk could be the risk of severely underestimating the amount of money which is to be required in order to do the necessary work. This is something that many first time investors find is a fairly common occurrence. Most people have unrealistic expectations of exactly how far their dollars will go when it comes to investing in the materials and labor needed to properly rehab a property. Even minor cosmetic repairs throughout a house can easily run into several thousands of dollars in order to repair. The flip side is that once these repairs are made the potential profits run into several tens of thousands of dollars.
Another risk that isn't often considered is the risk of overestimating abilities. This is one risk that costs not only precious time but valuable money as well. Not only is material wasted in the process of discovering you aren't exactly skilled in any particular tasks but also there are further expenses (often unplanned) involved in hiring the professional to repair the damage and replace the material that was wasted. When in doubt, it is almost always best to hire a professional if at all possible. This also leads to missing deadlines, going seriously off schedule, and adding yet another mortgage payment (if not more than one) to the overall price of the project.
The final risk is often something that simply cannot be seen or anticipated. This was experienced in the days immediately following 9-11 and should not be forgotten. The unforeseen happens every day. Markets crash; local economies can be devastated by the announcement of a major employer that it is going out of business (thinks of the collapse of companies such as Enron and World Comm and what they did to local economies). In these instances, the market will take quite a while to recover from the shock to its system and 'flippers' among other investors are often left feeling just as lost and devastated as those that were victimized by these companies-both through no fault of their own.
The things that we have absolutely no control over happen to be the issues that affect us most profoundly. This holds true with regards to property investment. The condition of the economic climate, the real estate market within an area, and unexpected news that affect either can often have the most profound impact on those who are investing in property in those areas whether for better or for worse. The trick is in deciding which risks of flipping properties are acceptable.
