Over the past few weeks we’ve started to look at the many different property strategies that can be used in the current market, and this week, we’re going to look at flips.
Another of my favourite strategies, it does pretty much what it says on the tin. It’s about buying a property as cheap as possible to then sell on and make a profit. It’s a great strategy and there are many reasons why it works so well.
Contrary to belief, you don’t necessarily have to do anything to a property at all in order to sell on at a profit – so long as you buy the property at the RIGHT price.
So, let’s think about how we could do this. A good example would be buying directly from a vendor – particularly a motivated vendor who isn’t solely concerned with the price. Perhaps they have another problem which could be solved by selling the property quickly. This might be divorce, repossession or even a property that has been inherited that they quickly want to get off their hands. With a scenario such as this, it might be possible to buy at a price which allows you to then sell on at a profit. Much like wholesaling – you buy cheap to then sell on at retail price.
This is something that I do quite often and on more than one occasion, I’ve come across properties that haven’t perhaps been ‘the best’ in terms of condition, but that did have potential. Just a few weeks back I took on a property like this and put it through an auction; I knew it be would attractive to those looking for a project and I made myself quite a profit.
This is an example of a flip at the most basic of levels.
However, if you do want to be a little more sophisticated, then there are other things you can do to make this strategy more creative – and to hopefully create even greater margins. For example, you could buy a property “cheaply” and undertake a refurbishment to add additional value before flipping.
To give a scenario: a property might be on the market at a discounted price to reflect the amount of work that needs doing to it to bring it up to scratch. By taking on this property as cheaply as possible and by undertaking the necessary works, you should then be able to make an even better margin still.
However, if this is your strategy then you always need to bear in mind who you are going to sell on to when the works are done. There are two reasons for this: firstly, so that you do the RIGHT specification of works, and secondly, so that you buy the RIGHT property.
For example, if you’re looking for “cheap” properties that would work as buy to lets, and if your end-buyer is likely to be an investor, then you need to remember that they will want a discount themselves – and this will eat into your margin.
It’s for this reason that most “flippers” choose to target the owner occupier market – buyers who prefer to have all work complete before buying so that they can move in straightway without really having to do anything.
It might be the case that they don’t have the time or the inclination to do the work, or they might not have the funds available to get the property up to scratch. What’s more, if they are an owner occupier they are likely to get a 90-95% mortgage so they only have to come up with the deposit (i.e. 5%) to turn the property around.
Owner occupiers are a great market to pursue because they do pay a premium to have the property in tip-top condition. From your perspective though, you do need to keep in mind their likely expectations as this might mean doing the property to a different level of specification.
As a rule of thumb, a refurbishment that is aimed at tenants is likely to be of a lower specification than it will be for owner occupiers – and this is something you really must factor in.
Overall though, whether you are doing single lets, HMOs or any other strategy, in my opinion you should always keep a look out for any properties that would make a good flip – they can be a great way to make some cash which can then be used to finance more buy to lets to grow your business.
Peter Jones B.Sc FRICS
By the way, I’ve rewritten and updated my best selling eBook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to ThePropertyTeacher.co.uk