10 Key Steps to Buying and Flipping Distressed Properties Without Taking Advantage of Owners in Hardship
Published 10:33 am 16 Jun 2018
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.
How to buy distressed properties?
- Identify potential properties
- Contact the owner and arrange a meeting
- Verify the information given to you by the homeowner
- Do the sums
- Negotiate with the owner
- Negotiate with lenders and lawyers
- Negotiate a short sale and the final purchase price
When an asset is purchased below its market value and then resold at a more appropriate price, there are substantial profits to be made.
That’s why 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. It might be a homeowner who has defaulted on their mortgage and had their home seized by the bank. (Such distressed sales are on the rise in markets such as Western Australia.)
Or perhaps it’s a divorcing couple who are keen to be rid of each other and want the family home sold as quickly as possible so that they can get on with their lives. Or maybe property investment partners who have had a falling out.
Other possible reasons for distressed property sales include a death in the family that means mortgage payments can no longer be met, and 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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10 Tips to flipping houses in Distressed
Buying and house flipping homes in distress for a win-win outcome
I have been teaching people how to buy and resell distressed property for more than a decade now and my advice has always been the same. There are excellent opportunities to make a profit, but don’t be exploitative.
Try to make the transaction a win-win for you and the vendor. Instead of being the grim reaper, you can be the white knight who provides the vendor with the fast sale they need, provided you treat them with respect, are upfront and reasonable. Behave ethically.
With this is mind, here are my 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 the 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.
How to start flipping houses in Australia
Many first-time house flippers think that by simply purchasing a house a 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 they take into account, transaction costs and holding costs.
However, it is certainly possible to make profit buying and selling houses, but you need to start by doing your homework.
Look for profit potential early on
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 candidate.
Remember, you need to make a significant amount of money – probably 10%, just to cover the costs of stamp duty, legals, 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% of the value of the property.
So on a $500,000 house, budget only $50,000 for total renovation costs.
It’s 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.
Calculate your profit first
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.
|Final Sale Price||$600,000|
|Renovation Costs (approx 10%)||$50,000|
|Stamp Duty + Legal||$20,000|
|Max Purchase Price||$465,000|
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 try and make a larger 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. Another option might be converting a laundry into an ensuite.
Once again, you need to do your homework and see if those changes will lead to price increases in your area of interest.
Flipping houses in Sydney
Sydney is probably the one market in Australia where owner-occupiers are prepared to live in an apartment for life. So trying to find underpriced apartments in in-demand areas 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 here 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.
Our flipping houses blueprint has everything you need to know about not just renovating houses, but identifying opportunities that have built-in profit potential. And many of these opportunities are not listed on the real estate portals.
If you follow our blueprint, it means you know at the time of purchase just how much money you stand to make from flipping a house. And better yet, you won’t have any other buyers trying to steal the opportunity from you.
Lawyer, Asset Protection Specialist and Property Educator
Dominique Grubisa is a practicing legal practitioner with over 22 years of legal and commercial experience. She is a property investor and developer, an entrepreneur with businesses in Australia and Southeast Asia, a speaker, educator, writer and published author. You may contact Dominique at firstname.lastname@example.org
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.