What the Flip is Flipping?
Flipping is a property investment strategy that made some people a great deal of money during the boom years – and caused others to lose a fortune. It became a dangerous preoccupation of serious speculators, some of whom managed to buy and sell properties quickly enough to run laughing all the way to the bank.
The term originated in the United States, but it has more recently become familiar to the British public owing to the MP expense scandal. Some Members of Parliament brought themselves and the whole reputation of parliament into disrepute by applying allowable expenses to purchase a second home closer to London, they then sold their second home repeatedly over a short period to create substantial profit while applying the primary residence qualification permitted under the tax rules. This application of flipping irritated and annoyed the public, because they were the ones paying the tax that financed the MPs expense claims in the first place.
While MPs (to this day) ferociously vocalised the fact that they had not broken any rules, the British public felt cheated – maybe the rules hadn’t been broken, but they had most certainly been twisted to breaking point. From this point onwards, flipping became a term derided by the majority – but it is nevertheless one that is still practised by many in the property investment arena today.
In its simplest form, there is nothing wrong with flipping. The basic concept is to buy a house cheap, essentially at below market value, and then make rudimentary improvements before selling it on at a profit. During the boom years, investors quickly realised they didn’t really need to make improvements and instead simply held on to the house or apartment while the market moved prices upwards. They then sold their asset at a marginal profit, without spending anything on it or doing anything to it.
While those ‘good days’ are gone, there are still bountiful opportunities to buy cheap, improve and sell on at a profit. In fact, the depressed housing market and dire financial circumstances of many homeowners has made buying cheap much easier for property investors, because there are far more people willing to sell their homes quickly to a willing buyer at substantially lower prices … and mostly to avert impending repossession by their lenders. Even the commercial property market has succumbed to this inviting opportunity. Savvy investors are pooling their financial resources to create so called vulture funds, buying properties from distressed sellers in huge volume.
Speed is one of the most essential ingredients of successful flipping. The intention is always to return a property to the market between exchange and completion, thereby reducing any possibility of additional expense. To achieve this, investors need to have adequate finance already in place (though if the plan works, the most you might need is a 5 or 10 per cent deposit), a conveyancer or solicitor ready-to-go and an agent prepared to pull out all the stops to sell the property on after it has been purchased. Actually, the agent needs to find a ready, willing and able buyer BEFORE the first purchase has completed, otherwise the flipper will have costs to incur. Many agents and realtors have come to the decision that flipping is as unethical as gazumping or gazundering, but that hasn’t stopped some from collaborating with investor clients and participating in the fast buy-sell strategy.
THE most essential ingredient for a successful flip is a property that can be bought quickly and at least 20 or 30 per cent below current valuation. One of the problems of applying the flipping model today is that while many dwellings can be snapped up at below market value (BMV), there is a danger they may not be re-sold quickly enough to prevent the market catching-up with their BMV price. A falling house price market is a risky one for all property speculators.
Of course there is also the age old quote from T S Eliot which says, ‘Only those who risk going too far can possibly find out how far they can go.’
Books by Tony Booth
- The Dangers of Property Investment
Investing in property has become a global phenomenon and, some might say, an obsession ...
- Why NOW Is The Right Time To Buy Property
As an estate agent, property investor and author of books on buying and selling, I am often asked whether now is the most lucrative time to buy property or whether it is best to wait until prices hit rock bottom ...