I noticed a theme in the conversations at the local investment club last week, as everyone was talking about flipping houses. Investors have been focused on buy and holds for the past several years but now, many are wondering, “Should I?…” and “Could I?…” This made me chuckle a bit under my breath because I have been successfully flipping houses in Chicago for years now. Indeed, the market is looking better than it has in a while for buying, renovating, and selling houses and there are some advantages to this particular niche. However, in order to make a good business out of flipping houses, investors should know what they are getting into long before they take the plunge.
How the Market Looks for Flipping Houses in Chicago
House flipping is becoming more popular than ever, thanks to favorable market conditions and shows like “Flip or Flop” which make these transactions look so easy and downright fun in many cases. In fact, house flips (defined as a house that sold within one year of the purchase) accounted for 6.1% of all sales nationwide—almost a full percentage point more than the previous year. But, Chicago, in particular, seems to show a flipping frenzy, holding its own in the top 20 of 126 major metropolitan areas for home flipping.
It’s no wonder; the Chicago market is ripe for real estate investors who are seeking to buy distressed homes. There are fewer homeowners underwater on their mortgages than in years prior. Although as of the fourth quarter of the year, almost 13% of Chicago property owners had a mortgage that was greater than the property’s market value. This creates an opportunity for investors to approach distressed homeowners facing foreclosure and offer a deal they may not be able to refuse.
In conjunction, home prices are rising, albeit more slowly than in the rest of the nation, but sellers are holding on to their property. That is resulting in a tight inventory of available houses and, as a result, buyers are hustling when it comes time to make an offer in prime areas. It looks like Chicago’s housing market forecast for investors is looking up and that now could be the best time for flipping homes.
Advantages and Disadvantages of Flipping Chicago Houses
Also, flipping a house holds the greatest potential for the best return on investment. If you can find a distressed property at a good price and manage your renovation budget well, selling at the current market value can place you in a favorable position. In addition, the shortened time frame between buying, rehabbing, and selling properties provides more market certainty for investors to jump into the opportunity.
That said, there are definitely things investors should be looking out for. Many new house flippers find themselves ensnared in a trap, as they’ve paid too much for the house. They get excited about the deal and start looking at the numbers sideways until it all makes sense. Then, they convince themselves to jump in head first. That mistake cannot be undone once the papers are signed. They then try to recoup their financial positioning by skimping on the renovation costs and the end result is that they have a property that is difficult or impossible to sell at the pre-planned price point.
A Cautionary Tale About House Flipping
Many new investors have heard that you are “safe” if the after-repair value can give you a 30% margin, plus the cost of repairs. But often, they underestimate the rehabbing and holding costs involved.
I recently met a new investor who took a huge loss financially in a deal. Jeff bought a rehabber property for $150,000, and at the time, he thought it was a steal. He calculated that he’d need to spend another $20,000 on repairs to bring the house up to market value. That ought to leave a nice chunk of change in the end if he sold it for $200,000, right?
On paper, it seemed like a great idea. Except there was one problem: Jeff forgot to account for the carrying, selling, and financing costs! He was so desperate to get out from under the property as a result, that he sold it for less than he’d hoped just to seal the hole in his pocket.
House Flipping Done Right
When Jeff told me the story of this common rookie mistake, I had to share how I have been making a living at buying, rehabbing, and selling houses over the years. You see, I made the same mistakes when I first started out in real estate investing. One day, a deal fell flat, so I dusted myself off and decided to take another tack: I became a HomeVestors® franchisee. Nowadays, instead of chasing leads on homeowners not yet ready to accept a price that makes sense for an investment, distressed homeowners call me when they want a quick cash deal. With HomeVestors®’ tools and resources, such as the proprietary ValueChek™ software, I can more easily determine the rehab costs and after-repair value of the property and then generally confidently make an offer on the spot.
If you plan to start a real estate investment business in Chicago, too, becoming a HomeVestors® franchisee with an independently owned and operated franchise is the only way to go. Contact us to find out more about our franchise opportunity.
Each franchise office is independently owned and operated.