Strategies

KPS XII – FLIPPING PROPERTY

A killer property strategy which is known to many is “flipping”– the practice of buying a property cheaply, doing it up and selling it on. It is a strategy you can use to make large capital sums on a regular basis – but it is a sophisticated strategy and you underestimate it at your peril.

Flipping shares similarities with other property strategies notably buy refurbish and refinance (BRR) and buy to let (BTL).

It is highly desirable to get a good grasp of BRR and auction purchases if flipping is a strategy you are planning to take on.

You will also benefit from knowing the inside track on bridging loans.

Perhaps the key to success with flipping is buying cheap.

1. Buy cheap

It is often said you make a profit on a property when you buy it. That is especially true with flipping.

The cheaper you can get a property for, the greater your chances of making a profit when selling it on and the more your likely gain. 

Common sources of cheap properties include:

  • Auctions
  • Sellers desperate to sell for financial reasons
  • Probate sales
  • Repossession sales
  • Specialist property sourcers.

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2. Decide what you mean by “cheap”

The term “cheap” is of course relative. You should develop or adopt a method for deciding if a property is cheap by your definition or criteria.

Here is a basic approach you could take:

  • Consider the asking price, likely selling price or maximum price you are willing to pay (base cost)
  • Work out the total costs, charges and fees of acquiring and later selling the property – including legal, financial and agent’s costs plus stamp duty (acquisition cost)
  • Work out the total cost of labour and materials to take the property to the point you intend (building cost)
  • Research the sale price you are likely to receive when you sell the property (sale price)

At the very least, for you to make a profit, the base cost plus acquisition cost and building cost should be less than the anticipated sale price.

You should go further by deciding how much less you require before you would be willing to proceed. Another way to look at this, is to ask yourself what minimum level of profit you require when doing a flip. 

Say you require a minimum profit level of 20% – with any purchase being considered cheap if it gives that level of profit or more.

In that case, base cost plus acquisition and building costs should be a minimum 20% lower than the expected sale price.

What you will note from this method is that you cannot look at the base cost in isolation when working out whether a property is “cheap”; you also need to take into account acquisition and building costs plus the likely sale price.

That is of course entirely realistic and necessary.

A property may seem very cheap looked at in isolation – but if it requires especially expensive building works to get it to the desired condition, it may be nowhere near as cheap as it seems.

The minimum profit level you opt for is up to you. It could be determined by your desired income or profits or the number, value or type of flips you intend to do each year.

However, you should bear in mind that income or profits may be reduced by taxation.    


SOME OTHER POWERFUL PROPERTY STRATEGIES
Option to purchase (profit from your control of a property)
Lease option (controlling and profiting from someone else’s property)
Delayed completion (completion is delayed to make a profit)


3. Adding value

The second key ingredient in making flipping a success is adding value. Part of the skill in flipping is identifying properties which will add the most value, all things being equal.

Generally, the worse the condition of a property, the more works it will need, the greater the value that can be added.

You may be able to add substantial value by doing major works such as:

  • Adding an extension
  • Splitting the property into two or more units
  • Loft conversion
  • Cellar/basement conversion.

You may also be able to add substantial value by changing the use of a property – for instance, from office to residential.

If a property only needs light refurbishment it is not going to add as much value as a wreck of a property needing to be gutted and rebuilt. Of course, the poorer the condition of a property, the more risk-laden the refurbishment and the greater the cost of works.

You will clearly need to look for properties matching your financial resources and experience in terms of refurbishment.

If you are a builder or have building knowledge or skills you will have an advantage over someone who will need to hire a builder.

If you hire a builder, you will need to consider how they are to be managed and whether you have the expertise to do so yourself. 

The cheaper you can secure a property for, the more of a head-start you give to your efforts to add value.

The relationship between time, cost and value is something you will need to assess closely.

Some works, such as a conversion from a house to flats, may be great for adding value, but if you need planning permission and that will take time and involve uncertainty, you need to factor such negatives into your calculations.

For your first flip, it is clearly sensible not to be over-ambitious by tackling a major or risk-laden project.

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4. Marketing and selling

Especially if you are relying on borrowed funds to finance the purchase or works, you will want to sell the property as soon as possible.

A quick sale is especially important if you are relying on expensive bridging funds.

You should therefore start the marketing process on the same day you buy the property.

Potential buyers can be shown around the property as it is being worked on. You may be able to negotiate an early sale by offering the buyer a discount and/or choice in terms of the décor, fixtures and fittings.

Ideally you should line up a buyer before you even purchase the property.

If you are able to link up with buy to let investors, you may be able to set up a ready supply of buyers for each property you work on.

5. Training, advice and assistance

One point which should stand out is the sheer number of variables which have to be taken into account when costing a flip – how very difficult the calculations are.

Flipping is a strategy where knowledge, experience and expertise count for a great deal.

If you are new to flipping, and especially if you are new to property, it is good practice to secure maximum knowledge and assistance in advance of start-up.

In terms of knowledge, you could look at:

  • Courses, online and offline
  • Training and workshops
  • Meetups
  • Internet research
  • Forums
  • Property blogs
  • Books, podcasts and videos.

In terms of assistance, you could look at:

  • Joint venture partner/s
  • On-going advice from a property professional familiar with flipping
  • Coaching or mentoring
  • Informal link up with someone you know who knows the strategy
  • Accountability partner.

It is particularly helpful to link up with someone with practical knowledge and successful experience of operating the strategy.

Theoretical knowledge is great but theoretical and practical is better.

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6. Risks and dangers

Flipping is a strategy of medium to high risk, depending on how the project is structured.

Highest risk arises where the property is purchased with the aid of a bridging loan or someone else’s money.

You may not be able to repay the sum borrowed because:

  • Your cannot sell the property at all (for instance, due to a sudden collapse in the property market)
  • You cannot sell for the price you anticipated (for instance, due to you over-estimating the likely sale price)
  • You cannot sell the property by the anticipated date due to the building works taking longer than expected. 

The bridging company or lender will want their money back by the due date and in default you will be in breach of your agreement and likely to face additional financial charges which, in a worst case scenario, could push you into loss making territory.

For these reasons, you should always have a plan A and a plan B for repaying any loan you have taken out before you end up in a real financial crisis. 

The level of risk is also high where completion of the building works is dependent on you obtaining planning permission or building regulations approval. These are matters outside your control, both in terms of the approval and the time it takes.

Again you will need to have alternative plans ready if you cannot get some official approval you need or it is significantly delayed so as to mess up your timetable.

A common and costly problem with flipping is overshoot of building works for any number or reasons – some due to fault, some fault-free. 

You can minimise the risk of the job taking longer than scheduled by various steps, including:

  • Correctly calculating the duration of the works in the first place
  • Using high quality experienced workmen who come highly recommended by someone you know and trust and who has used their services recently
  • Managing and supervising the works regularly or hiring someone to do so
  • Having contingency plans if something goes wrong, such as builders not turning up for work when expected.

Before embarking on a flip, it is sensible to assess the trends in the general property market – especially if you are embarking on a project likely to take more than 6 months to complete.

If  you are flipping a house and commentators are predicting a decline in house prices, you should factor that into your calculations and you should be aware that when prices start to fall they can do so rapidly – as they did in 2008 – when they fell by 15.9%, according to data from Nationwide .

7. Conclusion

Flipping can provide you with large capital gains on a regular basis. However, the rich rewards are matched by an array of risks.

If you want to make a living from flipping, you will need to develop an effective system to constantly find properties which are cheap by your criteria.

You will also need to develop a highly sophisticated system for accurately calculating the many elements of cost, value and timing (spreadsheets are a must) – ideally relying on the advice and assistance of experienced property people for your first couple of projects. 

Have you ever flipped a property? How did it go? Do you have any tips you would like to share with other readers?   Please leave your comments below.

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Dalton Barrett
Rebel Property Coach

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