The Strategies of Flipping Properties
The art of buying properties to flip has gotten a great deal of press recently, and not all of it has been good. To "flip" a property simply means to buy it at a low price and then sell it to someone else for a quick profit. Flipping goes on constantly, for a variety of reasons. First, some sellers simply get it wrong. They sell their property at below market value, thereby creating a
flipping opportunity for a shrewd purchaser.
Another reason is differing views of investing or differing levels of risk tolerance. Many investors don't like to spend the time needed to find a property that is undervalued. Their time may be too valuable. They would much rather let someone else do it for them, and then bring them the property to buy and hold for the longer term. In other words, they choose to have properties flipped to them, and they are willing to pay the flipper's
premium. In this scenario, both parties get a good deal, and both bring a different kind of value to the marketplace.
At different points over the years, we have been on both sides of flip transactions, usually depending on how we were trying to make money at that juncture. If our goal at the time was to make money to feed the family, we naturally tended to focus on the quick profit. Having achieved a certain level of financial security, we're now more inclined to take a longer-term approach, and we're happy to let people make some money finding good deals that they flip to us.
These flippers are often called "bird dogs" in the trade, because they sniff out the best deals. Sometimes, they are real estate agents. Other times, they are individual investors who have decided to
specialize in this area of the market—and some of them are very good at it. When you're an investor in the long-term mold, as we are today, good bird dogs can be worth their weight in gold. You don't negotiate too hard with them, because you want them to keep bringing you the best deals first. They are happy doing what they do best, and you are happy building long-term value. To us, a real estate transaction is most satisfying when it's a win/win proposition for all parties.
Back to that issue of bad publicity: when you hear the argument that flipping properties is somehow "wrong," it's usually because a bank has been burned as a result of the flip. Here's how it typically happens: someone buys a property and pays off an appraiser to generate an inflated appraisal of the property. The buyer then refinances to that appraised amount, which means that the property is
over financed. In other words, there's no built-up equity in the property, and there's more money loaned against the property than it is currently worth.
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