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Buying a "Flip"? Watch for These Four Pitfalls

Posted November 10th, 2011 under pitfalls, smart buying.

One of today's big fads is “flipping”: an investor buys a property at a cheap price, repairs or renovates it, and tries to sell it for a profit.

The profit supposedly comes from the investor's ability to identify an underpriced property and make it appealing to the current market. But in many cases, the profit comes from overpricing the home and relying on “wow factor” to make the sale.

If you're considering buying a flip, do your due diligence before you sign on the bottom line. Here are 4 pitfalls you need to keep in mind:

#1: New renovations can hide safety problems.

A newly-finished basement looks great, but what's hiding behind those new walls? There could be a serious moisture problem that re-appears 6 months after you move in.

New walls elsewhere in the home might be hiding faulty wiring, plumbing problems, or other defects.

An open-concept layout might look spacious and bright, but what about the walls that were removed? Were any of them load-bearing walls?

If you're buying a flip, make sure you have a detailed home inspection done by an inspector that you trust. Every renovation needs to be reviewed to make sure it's safe and was done by the rules.

#2: New renovations don't show wear and tear.

That new carpet feels wonderful, but how will it handle a family walking on it every day? Will those bathroom tiles crack and sink? Will those stairs be creaking in 6 months?

There's a big advantage to moving into a house where people are already living: you see it with real wear and tear. Flips show you a fantasy that won't last for long after you move in. Remind yourself that you'll be living there for years.

#3: Flips are renovated for sales appeal, not for functional living.

Buyers can be swayed by the “wow factor” of an attractive home, and often don't take the time to picture themselves living there. Flip sellers know this and focus their renovation dollars on sales appeal, not functional living.

The end result is that you might end up with a fancy-looking kitchen, but you bump your head every time you go past that badly-placed shelf.

When buying a home, take the time to imagine your daily routine. What will it be like to take a shower, get dressed, leave for work and arrive back home, cook and serve a meal, relax, and do laundry or dishes?

Go into each room and go through the routine. If the layout is poorly designed, you'll soon notice.

#4: Flashy design can hide cheap materials and poor work.

Buyers over-value cleanliness and decor (both easily corrected), while under-valuing quality materials and workmanship (both costly and inconvenient to correct).

When buying a home, you should never pay for decor, only for value. Value is anything which makes the home a better financial investment, and has nothing to do with style.

I'm not saying you shouldn't enjoy your home! I'm saying you shouldn't overpay for it just because it happens to be decorated in your style.

Some of the big corner-cutting areas for sellers are flooring, cupboard doors, windows, sinks, and roofing.

Your agent can point out cheap materials and will tell you whether the asking price is inflated.

In summary...

There's no rule that says a flip can't be the perfect home for you. Just remember that the investor is there to make a profit. Do your homework and make sure the reality lives up to the fantasy before you move in.

Want to know more about buying a flip? Just ask me, I'll be happy to help.