House flipping refers to a situation where someone (usually an investor) buys a “fixer-upper,” quickly does some renovations to improve its market value and then resells it for better than what they already have in it.
You can’t spend a lot of time browsing through HGTV or other reality shows without realizing that flipped properties are a very big deal. Investors love them because they can often make thousands on a property in a few months’ time. Communities tend to like them because they can improve neighborhood property values by cleaning up local eyesores.
But what about buyers? While buying a flipped property can be a good investment, it also comes with its own set of advantages and disadvantages. Here are some of the pros and cons:
The Pros of Buying a Flipped Property
One of the main advantages of buying a flipped property is that the home is move-in-ready. Flippers usually make significant improvements, and buyers can move in without having to do any major repairs or renovations.
Other benefits that often come with a flipped property include:
- Modern amenities: Flipped properties often come with modern amenities like stainless steel appliances, granite countertops and hardwood floors. Flippers aim to create a home that appeals to a broad range of buyers, so they invest in trendy finishes and features.
- Aesthetic value: Flippers typically use neutral colors, modern designs and high-end finishes to make a once-dated home look stylish and inviting. This can be a big selling point for buyers who want a home that looks and feels current.
- Increased property value: If the flip was done with due care, the seller likely added value to the property by making updates. This means that buyers may be able to resell the property for a profit down the line without doing much themselves.
Flipped properties are especially attractive to first-time homebuyers, since they may not have the time to put into a lot of renovations after the purchase – nor the money to do so after pulling together a big down payment and handling their relocation expenses.
The Cons of Buying a Flipped Property
Not all flippers are alike. Some genuinely care about the quality of the work they do and take a lot of pride in turning a blighted property into something that will be cherished for years to come by its new owners. Some, however, only care about their bottom line – so they may take shortcuts in their renovations that could be problematic later.
That makes it critically important to research the flipper’s reputation and track record. Look for reviews or references from previous buyers and check to see if the flipper is licensed and insured. Property inspections by professionals prior to a commitment, too, can give buyers peace of mind and assurance that the property was renovated correctly.
Some of the other problems you can encounter include:
- High price points: Flipped properties may be priced higher than similar homes in the area because the seller needs to recoup their investment. Buyers can end up paying more than they should and find themselves trapped in a property with an “underwater” mortgage (especially if the market suddenly softens).
- Legal issues: The operating rule here is “Buyer Beware!” Flippers often buy their investment properties through estate and bank auctions, and that can sometimes lead to problems with the title. Some flippers, too, may not acquire the proper permits for their renovations – and that can come back to haunt a homeowner later.
- Limited financing options: FHA loans, which are popular among first-time homebuyers, can be challenging to obtain for flipped properties. FHA rules say that the seller owns the property for a minimum of 90 days before selling. Additionally, FHA requires extra scrutiny and a second appraisal for flipped properties sold within 91 to 365 days of the seller’s acquisition. This policy is intended to protect buyers from purchasing homes that have been quickly flipped at a premium without substantial renovations. This extra process can result in delays or higher costs.
- No room for negotiation: Flippers often have a set price in mind for the property and may not be willing to negotiate on the price. This means that buyers may have less room to negotiate compared to traditional home purchases. Add that to the fact that flippers are usually good at driving up competition over their properties, and that can contribute to the problem of overpaying.
- Problem locations: Flippers thrive by rehabbing blighted properties, but blighted homes are commonly found in distressed areas. While you can find flipped properties in nice neighborhoods, you do need to proceed with caution. Before you invest, make sure that you truly believe the area is improving, not declining.
Ultimately, before making an offer on a flipped property, it’s wisest to do a cost-benefit (and a pro-con) analysis. Consider the purchase price, the renovations that were made and any potential repairs or maintenance costs you may still need to shoulder. Make sure that the cost of the property and renovations are reasonable compared to similar properties in the area.
What’s the Verdict? Are Flipped Properties a Good Buy or Not?
There’s really no authoritative answer to this question because every property – and buyer – is unique. A flipped property can be a good investment for buyers who want a move-in ready home with modern amenities. However, buyers should be aware of the potential drawbacks, including hidden issues, limited financing options and the possibility of overpaying. Working with a realtor who understands both your needs and the market can help you make an informed decision.
