If you've ever switched on a home improvement channel, you probably know about house flipping. Investors buy a home, renovate it and then sell it for a profit – at least that's the goal. It's particularly common in Las Vegas, a city where HGTV recently launched a show putting house flipping in the spotlight.
"It's a huge part of the market at this point," says Alan Hays, owner and corporate broker at Realty Executives of Southern Nevada. "Because the market is extremely aggressive right now, it seems like everyone and their brother is trying to become a house-flipper." When done correctly, flipping homes can be a great business, but he says when things go wrong, investors can lose large amounts of money.
To better understand the market for flipping homes in Las Vegas, U.S. News spoke with some of Las Vegas' top real estate agents. Here are three things they think are important for potential flippers to know.
Inspect, times four.
Before you purchase a home to flip, you want to know everything about the property so that you can budget accordingly. On television, flippers often buy homes at auction, but Mary Baca, broker and owner of Desert Lights Realty, warns that auctions can be tricky. "There are often liens on the title of auction homes, and with an auction property, you're not able to perform home inspections because often you can't gain interior access. It's very risky."
Instead of buying at auction, look for bank-owned or foreclosed homes available for purchase on the open market. According to Baca, who specializes in bank-owned homes, banks must resolve any lien issues before turning over the title to a new owner. Plus, you're able to inspect homes on the open market. Baca recommends four types of inspections: heating, ventilating and air conditioning; roof; electrical; and plumbing. "This can be as cheap as $150 per inspection, and it helps rule out any unforeseen repairs after purchase. A $600 investment could save you tens of thousands of dollars," Baca says.
Keep the sales price below $300,000.
Experts agree that the most common buyer for a home that has been renovated is a first-time homeowner with a Federal Housing Administration loan, so affordability is important. "The best property to flip is a single-family home with a final sales price under $300,000," Hays says. He explains that this is because, for 2017, the maximum loan amount for an FHA loan in Clark County is $287,500.
To keep the price right, you'll have to do the math ahead of time. "Anybody doing a flip needs to know the cost to repair and the after-market value," Hays says. He advises that a would-be flipper estimate the purchase price, renovation cost, hold-time cost (the cost to hold the property until it's ready to sell) and the cost to sell the property. "After all that, there needs to be a profit margin that you are comfortable with."
When estimating hold-time costs, keep in mind that to qualify for an FHA loan, a home must have been held by the current owner for 90 days, so you should probably wait three months before listing. Baca says, "The most popular vehicle for financing for first-time buyers is FHA, so if you list before 90 days, you eliminate your most popular buying pool."
Decide whether to rent or sell.
Once you have the property, the decision to rent or sell should be based on your return on investment, or ROI. "An investor looking to flip will have no long-term gain, so they should make decisions based on numbers that are currently recorded and not speculate about what the future is going to bring," Hays says.
If you're not comfortable with the profit margin, consider renting. Baca says, "If you're not going to make 10 to 15 percent, then entertain renting the property. Rents are very strong right now."
While Baca and Hays agree that the market for rehabbed homes is strong across the Valley, flipping is not a guaranteed success. Hays notes that the most successful flippers are often contractors or agents – in other words, experts in real estate. "A layman off the street is taking a large gamble," Hays says. "It's not like the TV shows; it's a business. You have to know your numbers and have plenty of reserves so when something goes south, you're not getting into trouble. It's a tougher business than you'd think it would be."
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