Facts About House Flipping
The process of purchasing a home specifically for immediate resale, also known as "house flipping," is popular among many real estate investors. The practice involves purchasing a home below market value, making necessary improvements to increase the home's value and then reselling it at a profit. In some cases, such as with foreclosures, no improvements are made prior to sale. While house flipping can be a risky venture, knowledgeable investors can realize big profits.
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Financial
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House flipping can be an expensive venture, requiring some amount of cash reserves to process. While bank financing can provide capital for the purchase of the house, repairs, upgrades and marketing the house for sale may require additional funds not covered by the initial loan. Understanding possible repairs or other issues prior to purchase can help an investor plan for overall financial requirements.
Taxes
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House flipping can result in short-term capital gains for the investor and possible tax implications. These implications can vary depending on the type of property involved and how long it is held before resale. Tax implications can also vary if the gain was realized by an individual investor or a business entity. Discussing the project with an accountant or tax attorney, prior to purchase, will help an investor better understand the issue.
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Government Regulation
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While house flipping is not illegal, the federal government has stepped in to curb fraud and illegal and abusive practices within the industry. For example, the Federal Housing Authority (FHA) has rules governing the availability of FHA-guaranteed loans for houses resold within 90 days of purchase. The inability of a potential purchaser to obtain an FHA loan may significantly impact the sale of a house. Although the FHA may suspend this rule to stimulate the housing market, it may be reinstated at any time.
Competition
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The practice of house flipping has produced large profits for many investors and significantly increased the competition for cheap houses. This competition has also resulted in an increase of the average purchase price for investment-type properties and made realizing a profit somewhat more difficult.
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