4 Dangers In Flipping Real Estate

If you have recently purchased some real estate for investment purposes, you are in good company. Recent reports suggest that as many as 25% of these purchases are made by those who plan on using the property for investment purposes only. If you hope to "flip" the property there are 4 things you must be aware of that can put a crimp on your profits.

<b>1. Property Taxes.</b> Keep the property for a few years and you may experience a surge in property taxes especially if your taxes are reevaluated during that time. Some hot real estate markets have seen taxes nearly double in just 5 or 6 years.

<b>2. Renovation Expenses.</b> You may have purchased a "fixer upper" at a bargain rate. Once your project is complete will you be able to recover the expenses and make a profit especially if the value of your renovated property is above those in your neighborhood? In addition, can you withstand a correction in real estate values?

<b>3. Insurance and Mortgage  Costs.</b> You will pay more for homeowners insurance if you do not occupy the residence and you have tenants. If you are financing the property you know that your mortgage rate is higher as well.

<b>4. Rental Pressures.</b> A market saturated with rentals will mean that the rents you can charge will be less than what you had hoped to receive. In some markets you are required to get special licensing in order to be a landlord. In other markets the legal rights of tenants mean you could have a lengthy and expensive battle in ridding yourself of a bad tenant. Will the lower income levels coupled with the added expenses drag your investment down?

Of course, you can limit your risks [and costs] by doing the majority of the upgrades yourself, appealing excessive property tax increases, and finding for yourself a trusted and dependable tenant. It isn't easy flipping a home, but with a lot of pluck and determination it can result in strong profits for you.

Don’t Rely Excessively On Appraisals

Getting an appraisal on a home is a fundamental aspect of making a purchase. While appraisals are certainly helpful, you should not put too much stock in them.

Don’t Rely Excessively On Appraisals

An appraisal is a valuation of a property by an independent appraiser. The appraiser does an evaluation of the home, considers the home in comparison to others of comparable type and so on. Once completed, the appraiser then issues a written appraisal value of the home. Many homebuyers make the assumption the appraisal is the true value of the home both now and in the future. This can be a dangerous assumption.

First, appraisals are limited by something known as a moment in time. The appraisal done today, may not be entirely relevant a month or two later. If a property has been on the market for a few months, the appraisal may not reflect a slowing market. This, in turn, means the appraised value is actually higher than the current market will support. Homebuyers run into problems when this occurs because they put too much value on the appraisal. A seller will often list the home below the appraised amount and homebuyers will think they are getting a deal. In reality, they are not and may actually be paying more than a new appraisal would support. The older the appraisal, the less value you should put into it.

Most homebuyers assume an appraiser inspects the home for defects and discounts the value of the home accordingly. This is not really the case. An appraiser is not really doing a critical home inspection. In fact, the appraiser contract and/or report usually contains a long disclaimer whereby the appraiser covers his derriere by noting he assumes the property is in good condition and isn’t liable if it is not. Obviously, that should scare you. This, of course, is why you should insist on a home inspection for any property you make an offer on.

An appraisal is a solid part of the equation when considering a home purchase. It is not, however, the piece de resistance when valuing the property.