10 Key Steps to Buying and Flipping Distressed Properties Without Taking Advantage of Owners in Hardship

Dominique Grubisa
Dominique Grubisa

Published 10:33 am 16 Jun 2020

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There’s plenty of interest in buying and selling distressed property. But what are the mechanics of the process? DG Institute Founder Dominique Grubisa outlines the 10 key steps to flipping houses and explains how you can make a profit while helping the property owner solve their financial problems. 

When an asset is purchased below its market value and then resold later at a more appropriate price, there are substantial profits to be made.

That’s why so-called distressed properties are so attractive to property investors. These are houses and units that have been placed on the market by vendors who are in a hurry to sell. The reason could be the homeowner has defaulted on their mortgage and had their home seized by the bank. Or it might be a divorcing couple who are keen to be rid of each other and want the family home sold as quickly as possible. Or perhaps property investment partners who have had a falling out.

Other possible reasons for distressed property sales include a death in the family that has resulted in no longer being able to meet mortgage payments, or a deceased estate being sold by the heirs. The reasons are wide and varied, but almost always involve some form of personal tragedy.

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Top 10 Tips To Flipping Houses In Distress

Buying and house flipping homes in distress for a win-win outcome

The good news is that buying and selling distressed properties can be a win-win situation for all involved. There are excellent opportunities to make a profit without being exploitative. Try to be a white knight for the distressed property vendor, providing them with the fast sale they need. Treat them with respect, be upfront and reasonable and behave ethically.

With this in mind, here are 10 steps to flipping a distressed property:

  1. Identify potential properties: Use some of the reasons for distressed properties coming on the market (outlined above) as a starting point. Divorces, deceased estates, bankruptcies and properties that are heading into foreclosure are a great place to start.
  2. Contact the owner and arrange a meeting: Find out about their situation, price requirements and reasons for selling.
  3. Verify the information given to you by the homeowner: Don’t rely on what you have been told. Conduct your own investigation into factors that will affect the initial sale price and then the ultimate resale value. Conduct a thorough inspection.
  4. Do your sums: Calculate the potential value of your investment. Analyse your costs and profits – what could you pay and still make an acceptable profit given your anticipated eventual sale price? None of this makes any sense unless you can make a profit.
  5. Negotiate with the owner: Try to arrive at a price that works for both of you. Remember don’t be exploitative, but also keep your mind on profitability.
  6. Negotiate with lenders and lawyers: You will need to secure finance. Depending on the type of sale (mortgagee in possession, etc) you are likely to be dealing with lawyers as well.
  7. Negotiate a short sale and the final purchase price. You will need to set up, check, and structure a short sale for the homeowner and present it to the lender to get their approval.
  8. Protect your interests: Once the deal is set, you will need to know how to protect your new property and avoid last-minute surprises.
  9. Fix it up: Distressed homes sometimes only need a little TLC to become a much better sale prospect. In other cases, you may wish to carry out substantial renovations to realise an even greater profit.
  10. Sell or rent it: Time your sale for maximum profit, while trying to minimise the amount of time you are paying interest on any borrowed monies. Alternatively, your plan might be to rent the property out, negatively gear any expenses and exploit capital growth.

So now you have the key steps to flipping houses in distress. The process is explained in more details on property investment webinar.

The Basics of Flipping Property

How to start flipping houses in Australia

Many first-time house flippers think that by simply purchasing a house and renovating the kitchen or bathroom and giving it a coat of paint, they stand ready to make a hefty profit. Unfortunately, for the most part, that is often not the case. In fact, most people lose money when they do a renovation when things like transaction and holding costs are taken into consideration.

However, it is certainly possible to make profit buying and selling houses; you just need to start by doing your homework. Look for profit potential right from the beginning.

The most important thing to do before even looking at a potential purchase is to start by doing some analysis in the suburbs that you’re interested in buying into. Start by assessing the difference in price between renovated properties and unrenovated. If there is little difference or only a small amount of potential profit, you can quickly rule those areas out as possible candidates. Remember, you need to make a significant amount of money –somewhere around 10 per cent, just to cover the costs of stamp duty, legal fees, interest and selling costs alone. That’s before you pay for any renovation costs.

Another big mistake new house flippers make is they spend too much. A good rule of thumb here is to not spend more than 10 per cent of the value of the property. So, on a $500,000 house, budget only $50,000 for total renovation costs.

It’s also important to renovate the home with the end-user in mind. You want to be appealing to owner-occupiers at the end of the day as they are the types of buyers who are prepared to pay for something they love – and will fight each other to get it. So, make sure to understand who these people are and what they want in a property in your area of interest.

A good way to make sure you are buying correctly is to work out your profit and then work backwards to your purchase price. That way you know how much you can ultimately spend on the property to make a profit.

House Flipping Profit Margin Example

A good way to make sure you are buying correctly is to work out your profit and then work backwards to your purchase price. That way you know how much you can ultimately spend on the property to make a profit.

For example:

Items Amount
Max Purchase Price: $465,000
Renovation Costs (approx. 10%): $50,000
Stamp Duty + Legal: $20,000
Selling Costs: $10,000
Interest Costs: $10,000
Final Sale Price: $600,000
Intended Profit: $50,000

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How to flip apartments

When you are looking to flip an apartment for a quick profit, there are a few things you can do to maximise your profit.

A cosmetic renovation alone, might not be enough to make a decent profit on the deal. However, by going beyond the basics and making some structural changes, you can potentially find more buyers and more profits.

A few good options to consider are removing walls and making an old-style apartment into open plan (bear in mind any structural changes you make must firstly be approved by a certified engineer and that any changes also meet body corporate requirements). Another option might be converting a laundry into an en suite. Once again, you need to do your homework and see if those changes will lead to price increases in your area of interest.

Flipping properties in different Australian states

Flipping homes in Sydney

Sydney is probably the one market in Australia where owner-occupiers are prepared to live in an apartment for their entire life. So, trying to find under-priced apartments in ‘in-demand’ areas which will allow you to achieve a good end sales value at a lower price point.

Flipping houses in Brisbane

Brisbane is not as dense as either Melbourne or Sydney and you can get homes at lower price points that have more options. One effective strategy in Brisbane is to purchase a house on a large block of land and subdivide the back half while renovating the home at the front for a profit.

Flipping houses in Melbourne

In Melbourne, it’s important to make sure you are appealing to owner-occupiers and a good well-renovated home will likely command a premium. But just consider the price points will be very high for first-time investors.

House flipping seminars

As we’ve seen there is a fair bit to consider when trying to work out how to profitably flip houses in Australia. As with most things in real estate, you make your profit when you buy. So, getting the very best deal on a property at the time of purchase is where you will be making the bulk of your profits. Knowledge is power, so getting the right information, support and systems is a good starting point for getting the right.

FAQ’s

Of course. Provided you pay the appropriate taxes, are honest in your applications for finance and obtain approval for any renovations, there are no legal impediments to buying homes and selling them later for a profit. Use your own discretion as to how much debt and responsibility you are able to take on. You may want to start by flipping one property, rather than taking on five at once!

How long does it take to flip a house?

The amount of time you hold onto a property you intend to flip will depend on market conditions and the extent of any renovations you intend to carry out. If adding a bedroom or rumpus room will add significant market value, it may be worth holding onto the property for a year or more. However, in most cases you will aim for a rapid re-sale, especially if you have borrowed money for the deal and are paying interest. A typical turn-around time for a flip where mostly cosmetic changes are required might be 4-6 months. This includes acquisition, renovation and sale.

Can flipping houses make you rich?

This depends on your ability, knowledge of the market and business acumen. Plenty of amateur flippers barely recover their costs or lose money on deals by overinvesting in renovations and failing to budget for costs such as interest payments and stamp duty. However, flippers who undertake their due diligence, understand the market, provide properties that people want and budget correctly stand to make good profits.

How do I flip a house without paying capital gains?

In general terms, capital gains tax is payable when you sell a property other than your primary place of residence for a profit. Your profit on the deal is added to your personal income tax in the year of sale and taxed at your top marginal tax rate. When a property is sold within a year of purchase, the entire profit amount is taxed. However, you are entitled to a 50 per cent discount if you sell the property after more than a year. If a flipped property is listed as your primary place of residence for more than six months, it is typically exempt from capital gains tax.

How do I get into flipping houses?

There are no formal qualifications required to become a house flipper. Anyone with the money to invest in the purchase and renovations of properties can enter the market. That said, there are an increasing number of institutions and bodies offering individuals the chance to be educated in the skills required for flipping, such as conducting due diligence, researching the market and preparing an accurate budget.


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DOMINIQUE GRUBISA
Lawyer, Asset Protection Specialist and Property Educator

Dominique Grubisa is a practicing lawyer with over 25 years experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author.

Dominique has successfully built businesses from start-up to turning over tens of millions of dollars in Australia and internationally. Her passion is making the legal system fairer and more accessible for everyone and empowering people by sharing knowledge.

Dominique’s exceptional experience as both a lawyer and entrepreneur, means that she is in a unique position to share her rare knowledge to those of us wishing to learn how to build wealth and succeed in business and property. Through her proprietary education platforms, Dominique is able to successfully educate, coach and advise thousands of clients on how to grow and protect their wealth.


This column has been written for general information purposes only. It is not intended as legal, financial or investment advice and should not be construed or relied on as such.

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