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Research Before ‘Flipping’ a Home

RIO RANCHO, N.M. — Q: I’m a contractor and I’m thinking of buying foreclosures, fixing them up and then selling them. I’m nervous because of how bad the market is, but it seems like something I could do well. Should I just forget about it? What do you think?

A: What you’re talking about is commonly called “flipping,” but that’s considered a bad term with lenders since it implies you’re not improving the property significantly. That said, I call this “renovating and re-listing.” There is certainly a large amount of risk involved, and that risk goes up or down depending on where the house is and how much you try to sell it for. The key is to buy it for a low enough amount that you can put some money into renovating it in a way that genuinely increases the value and makes the house highly sellable. Since you’re a contractor, you have a significant advantage, and this might be a great venture for you.

The government also recognizes the value of these efforts so they’ve extended the waiver to the anti-flipping laws making it possible for investors to use (FHA) Federal Housing Administration-backed financing and sell properties as quickly as possible rather than making them wait the obligatory 90 days. This opens up your financing options and allows you to sell the house immediately, if possible. According to Christine Turpen at Superior Mortgage in Albuquerque, the waiver has been extended through 2012 and might even be extended after that. There are some restrictions, so be sure to talk to your lender about this before you start looking for houses. In the government’s eyes, this program provides a way for people to easily and effectively improve areas that have a lot of foreclosures on the market, where properties are sitting empty and deteriorating at a rapid rate. If you think about it, if more investors start renovating and re-listing, we could have the housing in long-neglected areas get better rapidly.

So, you’ve got the expertise. You’ve got options for the financing. Now you need some basics so you don’t get into financial trouble yourself. There are a few considerations when selecting your first house. You’ll need to buy a house for little enough to allow you to do the work and then sell it at a profit. The first step is to have a Realtor help you identify the properties that have the “upside potential,” meaning once you put the money into fixing it up, you’ll still have plenty of room for a mark up. Your Realtor will research comparables of renovated homes that have sold in the areas so you’ll know the maximum you can get for the property. Keep a big margin, though. In this market, you’ll likely have to sell it for less than the most recent sales since prices in the many parts of town that are still dropping.

So, go out there and see what’s available. Do it in a way that doesn’t put you at too great a financial risk and make sure you can afford the payments for a while in case the house sits on the market after you’ve re-listed it. It should sell relatively quickly if you do it right. But houses can sit on the market these days, so you want to be prepared.

Talia Freedman is a Realtor with Signature Southwest Properties

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