Each day that you keep the house with you could already mean money going down the drain. You could end up paying for homeowner’s insurance, utilities, and other expenses that you may not be able to get back from your buyer later.
As long as you’re holding on to the house, you will have to spend for its upkeep and maintenance such as paying somebody to mow the lawn – just to keep it in a sellable condition.
You should also remember that most insurance companies do not cover vandalism after the first thirty days of owning the property. Therefore, a house up for sale with no one looking after it is a magnet for vandals and thieves. Another major expense to consider is your monthly payment to your lender in case you’ve borrowed money to buy it. So, acting quickly to get the property off your possession and into the hands of your buyer as quickly as possible should be the top priority.
Flipping Houses: The Best Selling Tips
Selling a house is not an easy task. But if familiar with the basics and implement your strategy correctly – things can be much easier. Of course, you can’t control market sentiment or financial conditions, but there are some important parameters you can take advantage of. Here are the most important selling tip for flippers:
1. Market At The Right Time
Timing is essential, so you have to know when it is the right time to begin marketing for your flips. You can ask many players and get so many different answers. Even experts and seasoned flippers do not agree on when is the best time to start marketing properties for sale.
Normally, realtors would opt to start active marketing and open house showings only after the property is 100% ready.
This means that the workers have already polished, cleaned and even decorated the property. This is understandable because the agent wants to show off a perfect looking house to easily get a higher price. A higher price means more commission for the real estate agent and more profit for the house flipper alike.
However, each day that the house doesn’t sell means money and profit leaking off the business because of the additional holding costs. Some astute rehabbers begin looking for buyers or marketing opportunities from the day they acquire the property. Obviously, if it takes you less time to rehab the house and less time to resell it, the less risk you take. More importantly, this accounts for a greater profit potential for you.
In some cases, some buyers find this an ideal setting.
There are families who would rather complete the improvements under their control so that it would suit their personal tastes and preferences. This is not usually the norm because most house flippers don’t want the headache and inconvenience of another person giving orders on the job site.
The disadvantage of marketing the house too early is that some buyers would not have the ability to envision how the house would look in the end and may not appreciate the final selling price. This may cause them to back off from an unfinished project. It all depends on the kind of buyer that you have and how convincingly you can present the property. If you have a budget, you can try out these options.
2. Plan Your Exit Strategy
Your exit strategy is equally as important as your entry strategy, so make sure you formulate one. You will find a lot of exit strategies that you can copy and they are not at all bad. Find a good exit strategy that will provide you with the best results as an investor when your house flip project comes to a close.
Don’t worry about making a wrong exit strategy as there is hardly none. Any exit strategy that you choose will have its own advantage and disadvantage.
3. How To Set a Price
You should always go back to the business plan that you made when you started the trade. Make sure that you have a sensible pricing system that you aligned to the market in consideration of how much return you want on your investment property. It’s also beneficial to do some benchmarking to determine how low a price you can go without losing money. Having this amount in your head will help you turn up a decent income when you negotiate with buyers.
As you review your business plan, revisit the price you first noted to sell the property and check if it is still relevant at the moment.
When setting a selling price, get a least three realtors to take a look at the property and give their individual suggested listing prices to help you get an idea of its market value. The realtors should be able to show you the reasons for their suggested prices, with reference to comparable homes for sale, recent properties that buyers grabbed in the area and homes with similar recent upgrade works.
4. Traditional Selling
As an exit strategy, traditional selling happens when the buyer becomes the one responsible for their own financing. This is the common method, which means that the buyer bids on a house when they know they can find acceptable financing for it. Then, they go to different brokers or lenders to look for a mortgage.
Recently, people have raised an uproar over the traditional lenders’ tight control when it comes to mortgage lending.
These stricter measures have proven to be a barrier to people who previously had no trouble qualifying for a mortgage but are now having difficulties getting a loan. With the tight measures in place, even the most qualified borrower will have to bear with an extensive and detailed underwriting process before a lender grants an approval.
5. Seller Financing Can Be Crucial
Your house could attract a lot of interested persons, but in reality, people who want to buy your house may find it difficult to get a mortgage especially with the current economic situation. The lending atmosphere may drive sellers to ask for lower prices, sell for a loss, or just keep waiting for a qualified borrower to come. If you are really in a hurry to sell, you could explore seller financing.
Seller financing has resurrected in recent years and has become popular in the residential housing market.
Although not everyone can go into it, there are a lot of benefits you can get from seller financing. If a seller needs to have cash in a hurry, seller financing would allow him to make a faster sale. Seller financing also expands the number of potential buyers by giving people who may not qualify for financing a chance to own the property.
Closing happens faster since there is no need for an outside lender and the property may command a higher selling price if the seller agrees to “hold the paper” on the loan. This also leads to a lower fee for the buyer, freeing up more of his cash for the property purchase. The seller will receive a stream of income because of the note and he could sell that same note to a third party is he so desires.
Keep in mind though, that there are also disadvantages for both parties in seller financing. The buyer would probably have to settle with a higher acquisition cost, a higher interest rate, and must put in a bigger down payment. The situation becomes even more troublesome if there is still an outstanding mortgage on the property under the name of the seller.
6. Hard Times? Consider Rental
If your circumstances will permit, you can also try to rent the property instead of selling it. In fact, it is an effective real estate exit strategy. Just make sure that you offer it at a rate that is consistent with the market for the size and type of property you have.
Many house flippers hold onto renovated properties so they can receive cash flow from it over a period of time rather than sell them outright for a one-time profit. You should just decide whether you want this as a short-term or a long-term strategy.
In a short-term strategy, the house owner maximizes the rental income by having someone renting it all the time.
This is possible if the neighborhood is primarily a rental area where the investor can rent it out and wait until an optimal time comes to sell the property.
In a long-term strategy, the rehabber makes an investment to receive positive cash flow in the form of rent over an extended period of time and is not primarily concerned about selling the property immediately.
7. Have a Marketing Plan
Don’t expect that because you are able to build a good house, buyers will come running to your doorsteps. You will have to rely on an effective real estate marketing plan to attract potential buyers to look at your home.
Whether you’re doing the selling by yourself or using a listing agent, you will have the same goal: to sell the house at the highest possible price in the shortest amount of time.
Flipping House Marketing Options
1. Real Estate Agent
Look for the right real estate agent who can also be an effective marketing partner. Even popular house flipping celebrities from reality shows like ‘Flip This House’ turn to Realtors® to help them market and sell their properties. Other veteran investors have put up their own real estate brokerages to dispose of their properties in the market. Warren Buffet has his own Berkshire Hathaway Home Services as his entry into the business. If you’re an average investor, a local, well-informed agent can expand your borders.
However, there are also some disadvantages to listing properties with Realtors.
The first thing you will have to deal with is their commission. Paying commission to another person is a decision that you have to decide for yourself if it’s worth it. Of course, there will be investors who will try to negotiate with the agent. Another important consideration is the time factor.
Some agents will have a minimum locked in period for listing your properties. Can you afford to list your properties for 6 to 12 months without any guarantee that your property will sell during that period? Sharp flippers try to be in and out of deals in 60 to 90 days or less. There is also the factor of the term of your loan. If you enjoy a 6-month asset-based loan, it’s foolish to sign a 12-month listing agreement.
Conversely, there are advantages to working with agents. You can enjoy MLS (multiple listing services), exposure to a wider audience, and access to a professional realtor. Just make sure they improve, not hurt, your bottom line.
2. Hybrid Real Estate Services
The good news is, you may be able to find hybrid services that can give you many of the same benefits of listing with a Realtor but without having to pay at all.
You can generally divide them into two categories:
- Flat fee listing services offered by licensed real estate brokerages
- For-Sale-By-Owner (FSBO) services
Around 60% of home sales happen through MLS, so it’s obvious that it really helps. Spending a few hundred dollars to list your properties on MLS is a good use of your marketing budget. This way, you’ll come out as the seller while a buyer’s agent will connect you to the direct buyer. Of course, you will have to pay commission to the buyer’s agent, but typically, it’s about half the cost of the average MLS listing. With this, you don’t pay a seller’s agent commission..
3. Trust Yourself
A real estate investor can also market his properties for sale by himself. Here are some things he can do:
- Run newspaper and magazine ads in popular local publications.
- Do an email marketing campaign.
- Take advantage of various social media platforms to advertise the properties for sale.
- Avail of PPC (pay per click) services and other online marketing apps.
- Build your own real estate website to promote your properties for sale.
- Do personal networking with local professionals through contacts or by joining investor groups.
- Send out direct mail marketing materials to people.
- Organize open houses to show people the properties for sale.
All of these marketing tools work one way or another. However, take note that they run on their own cycles which make them more or less effective during certain times of the year. In a booming seller’s market, the simple strategies like a yard sign or a Craiglist ad can help sell the properties in a short time, sometimes just hours. In tough times, it can take a lot of time and of course, more marketing initiatives to sell.
How To Choose?
There are many ways to market your investment property for sale. The trick is to find the right avenue based on personal considerations such as:
- The property’s location
- Your general real estate investment strategy and the business model you are following
- How you are funding your house flip and the terms of your lenders
- The unique property characteristics and features
- How the real estate market is behaving now
- Your financial target for the transaction
- Your target buyer for your property
- How good your agent is
As always, there are advantages and disadvantages to each path.
Make an honest-to-goodness assessment of all the relevant things before you decide to do the selling on your own. Developing a comprehensive real estate marketing plan is no joke. You must take into account the following:
- Your knowledge of the local market and comparable home values in the area
- Establishing the best listing price for your property
- The best way to present your house
- Providing all the necessary disclosures
- Creating your advertising decks, including professional photographs of the interior and exterior of the house
- Listing your property on websites that are popular to home buyers
- Making yourself available during open houses to show the property
- Evaluating offers and deciding on contingencies
- Negotiation of the final selling price and conditions of sale
- Ensuring that closing happens after accepting an offer and making certain that buyers follow the schedules
- Being present during the closing and understanding the process
Having a good agent as part of your house flipping team will easily save you from a lot of headaches. It’s particularly helpful in case you also have a full-time job because selling the house will cost you time aside from money. Just be sure that you can allocate your time, energy and other resources to work on all these details.
House Flipping Selling Taxes And Cost
The IRS does not look at house-flipping as passive investing. The tax rules define it as “active income” so house flippers should treat profits on house flips as ordinary income. They merit tax rates between 10% to 37% and not the lower 0% to 20% for capital gains. Aside from that, taxes on flipping houses will generally include self-employment tax.
Ordinary Income Vs Capital Gains
If the investor falls under the IRS category as a “dealer”, taxes for his profits from most property flips will just be ordinary income tax rate. We will identify some minimal exceptions below but for most fix and flip profits, the investor will pay according to his income tax bracket between 10% to 37%. In the eyes of the IRS, flippers are “active investors” and therefore earn active profits.
Most fix and flip investors are dealers such that they hold their fix and flip houses for a short period and the majority of their annual income comes from flipping properties.
This is also true form real estate investors who only flip houses from time to time and the IRS labels them as dealers and tax them at ordinary income rates.
Although in some situations, the IRS may consider a deal as a passive investment and subject it to more favorable capital gains taxes (between 0% to 20%). These are properties that the investor holds for more than a year and then rents to tenants or even uses as his own dwelling. The investor can push this into a passive investment category, but this usually excludes fix and flip investors. If you want to know more about how to get a dealer status, read on below.
Flipping Houses: What’s The Ordinary Income Tax?
If your classification is as a dealer, you should use your prevailing ordinary income rate to compute the tax on your profit from a flip. Right now, the income tax rates range from 10% to 37%. On top of this, the IRS will subject you to self-employment tax, which is the self-employed person’s equivalent to FICA, that is around 15.3% or double what you typically pay as a W2 employee.
Naturally, the higher your annual profit, the more taxes you will pay in accordance with your current tax bracket. A dealer, however, will pay a minimum of 25.3% or a maximum of 53.3% depending on his tax bracket. So, when you make your financial projections, don’t even think that you will keep all the profits to yourself – Uncle Sam usually gets the bigger slice of the pie.
When Capital Gains Taxes Apply To Flipping Houses
If you’re lucky enough to escape the ‘dealer’ classification, getting most of your income from flipping houses and selling them off within 1 year is optimum. Your taxes on the profits from the sale will be at the lower capital gains rates.
But don’t get your hopes too high because this is rare for most flippers because a great number of the time, they pay using the ordinary income tax rate. Nevertheless, it does happen. There’s even a bonus: if you qualify for capital gains tax treatment, you don’t have to pay self-employment tax.
House Flipping: Short-Term Capital Gains Taxes
If you hold the property for less than 12 months, your profit from the flip doesn’t get any preferential treatment from the IRS. You will pay at ordinary income tax rates on short-term capital gain whether IRS looks at you as a dealer or investor. The good thing is, you have the bonus of not paying self-employment tax, so you can save a little, after all.
House Flipping: Long Term Capital Gains Taxes
If you hold the property form more than 1 year and the IRS has not classified you as a dealer, you pay only according to long-term capital gains rates for the profit from the flip. Presently, the rates range from 0% to 20% for many taxpayers. Side-by-side with the potent ordinary income tax rates and self-employment tax, that’s favorable. However, since most house flippers normally buy, renovate, and sell a property within 12 months, this is a rare event.
Another important thing to know is the seller’s closing costs. How much of an impact will they have on your profit margin? Remember that aside from your usual expenses, you will still have to pay the government the corresponding taxes from this deal.
When you’re finally transferring the title of the property, the closing costs can rise to a material amount for both buyer and seller. Usually, the seller has to pay a real estate broker’s commission, closing fees, title fees, some transfer taxes, and if necessary, all the unpaid school and real estate taxes that accumulated while they owned the property.
On top of these items, there might arise some other unexpected fees that will, of course, eat into your bottom line.
So, make provisions for things like lien releases, mortgage prepayment penalties, notary fees, escrow fees, recording fees, lawyers’ fees, and repairs. Many agreements will even contain seller concessions, which will form part of the fees.
Fees differ substantially from state to state, and can even vary within states, so it’s close to impossible to provide an estimate of their costs. The thing to remember is that they can be considerably high. If you’re working with a real estate agent, you can ask him to provide an estimate of your all-inclusive closing costs as you begin your dealings. Familiarize yourself with what the estimate contains, so you can use those figures when you negotiate over various items with interested buyers.