8 Property Flipping Questions
1. What is property flipping?
Firstly I’ll explain the word flipping. It sounds interesting and fun, doesn’t it? Well, it could end up being the most dangerous thing you ever do.
Flipping is the process of buying a property but then selling, before it completes, to someone else. So you never actually own the property.
I say interesting and fun above because it is an amazing feeling when you can do it successfully…it`s easy money. However, it’s also a salesperson’s easiest selling tool when it comes to selling you an off-plan property…hence why I say it’s potentially the most dangerous thing because, if you don’t have the money to complete, you could lose your entire investment.
With flipping, you will normally exchange on the property (although not strictly required), which locks in the price you have negotiated, and some time before completion, you find a willing buyer who will pay more than you paid for the property, so you flip your off-plan property before completion.
2. What's the golden rule of property flipping?
If you don’t have the money to complete on a property investment, then don’t buy it to flip.
Anytime you hear the word ‘flip’, think risk and I mean high risk. Always think “Have I got to the money there to complete?” You must, you are legally bound to complete.
I had known of a man in Spain who bought three properties off-plan. He went out to buy one family holiday home, and ended up buying three from the salesperson because the latter said: “Why don’t you buy three? We’ll sell the other two for you, and then that money you make will pay that one off and you won’t have a mortgage”. Well, we can all guess the end of that story, can`t we? None of them have sold, and the purchaser is now left holding all three after struggling to put the money together to complete… he’s also struggling to keep up the repayments, as rents have dropped.
3. How much money can I make from flipping?
Capital profits with this strategy are good, but it doesn’t help you build a portfolio.
Because you’re getting rid of the property by selling it off. It’s a great strategy to release capital, but watch you don’t spend it all!
The challenge here is that you might make £20,000, even £50,000, from flipping the property, but then what are you going to do with that money? Are you going to plough it back into buying investment property and holding it? Or are you going to go and spend it on lifestyle?
It will disappear quickly if you choose the lifestyle option. But, by building a portfolio, you’re going to be able to enjoy the lifestyle option continuously and especially in retirement.
4. It sounds easy! Why doesn’t everyone do it?
Property flipping is harder than you think.
Owner Occupiers generally want to see the finished product so they won’t buy your property until it is complete. So this means that your market is restricted to investors just like you.
Dealing with investors means they want to buy low so they can get a deal, they’re more price conscious than owner occupiers who are driven more by emotions.
The investor who is flipping the property will in many cases have spoken to an agent or gone on a property website and decided the price they want. This is more often than not, what the property is worth new to buy from the developer, and in many cases more.
Investors have an inflated idea of what a property is worth and agents don’t help this. After all, estate agents always practice ‘sell up, manage down’, where they give you the highest possible price and then manage your expectations down to reality.
A lot of the time inflated property values also come from international investors who are being told by seminars and exhibitions a load of hob-nob about pricing and what they should sell for.
So when you put an investor at one end with an inflated value of what a property is worth and an investor at the other who wants to make money, the two don’t meet.
5. Won’t my selling agent get me the best possible price?
Estate Agents are bombarded with requests to flip property by investors who are desperate to sell as they got mis-sold the costs associated with the purchase, even bought two on the guarantee that the selling agent would flip it for them. However, when it comes time that agent is nowhere to be seen.
Be careful of who you buy from and be wary of property salespeople who urge you to flip a property as a foolproof way to get-rich-quick. If a property deal is worthwhile, it’s worthwhile in the long-term.
6. Are there any legal requirements I need to know?
Yes! Flipping property requires that the contracts must be assignable to another party. Even with this you still may have to get permission to assign from the developer which means you can’t leave it until the last minute. Do this at least 3 to 6 months before or even earlier.
The point about assignable contracts is an important one. As not many banks grant mortgages for assignable contracts in the UK your market is limited to cash buyers, overseas investors and a very limited amount of lenders, further restricting who you can sell to.
7. I still want to flip! When’s the best time to do it?
Flipping is possible at any stage of what I call my Property Trend Cycle (you can read more on this by downloading the book at the bottom of this post). My concern is that far too many people overlook just how hard it can be in some stages of the market.
When the market is between stages 1 and 3, you are pretty sure you’ll be able to flip your property.
Through stages 3 to 10, you are going to have real problems unless you are very realistic with your pricing. However, it’s never, guaranteed, no matter what the salesperson says.
8. What if I buy two properties and flip one?
This is an interesting investment strategy. Here you buy two or more, exchange on all of them, get equitable title, and then flip one before completion. The money you make is effectively cash in the bank upon completion.
Interestingly, for a lot of the time you’re not going to get paid until completion because, although that person is going to exchange on that property, it’s not until completion that you see the full amount of the funds.
That may be two or three years away, so this is not necessarily a good strategy if you are looking for cash flow from your property investment. It’s a great way to release capital but, again, it’s not building your portfolio.
Remember that flipping is a great marketing term – it sounds fantastic but, without the proper knowledge, it can cost you the earth. Always ensure you’ve got sufficient funds to complete on every property that you buy, and this includes off plan property. I’ve seen too many people, in the 15 years that I’ve been doing this, literally wipe out their entire portfolios, because they stuffed this up. They expected to buy two or three and sell.
A word on greed…
I once had a potential client who had bought five properties and assumed that he’d only complete on one. What happened? The market turned and he lost everything. He didn’t keep any property. You don’t want to be greedy; there’s plenty for all, but don’t be greedy, because you will get burned.
Live with passion,
Brett Alegre-Wood
