Flipping Houses - Courant.com

Is now a good time to buy investment properties for flipping?

Opinions vary widely. Real estate agents say buy-and-hold is a smarter strategy, but some flippers say there are great deals to be had with so many short sales and foreclosures on the market.

In the past three years, Phil Zimbardi has bought seven properties in New Haven County and successfully rehabbed and sold them at a profit.

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"The key is to be in and out in four or five months," said Zimbardi, who runs the rehabhousesinct.com website and is a real estate agent specializing in foreclosures. "It's a full-time job with a good income."

For example, Zimbardi might buy a wreck of a 1,200-square-foot home in East Haven for about $100,000. He'd spend about $40,000 to renovate, including a new roof, kitchen, bath, furnace, light landscaping, siding, paint, carpet, windows and doors. Zimbardi typically hires a contractor to do all repairs, then puts the house on the market at slightly less than the comparable houses on the street, for instance about $200,000. After other costs are subtracted, he would earn about $33,000 in profit. (See the formula below).

Zimbardi is not generally a cash buyer but instead relies on loans from so-called hard-money lenders. He borrows the money for a relatively short time at a higher interest rate: 12 percent, with 3 points. He still manages to make money because he gets the properties renovated quickly and sold in two to three weeks.

Zimbardi chooses the properties by adhering to a strict formula that is a good guideline for anyone considering flipping:

The "after-repair value" of the house multiplied by 70 percent, minus the repair costs and carrying costs, such as the interest on the loan, utilities while the house is being worked on, closings and fee to the real estate agents.

The trick is correctly predicting what the buyer will pay for the house; no fun for the faint of heart.

"You really gotta know your stuff," Zimbardi said. "If you can buy the house at the formula price, you'll do OK. If you don't estimate the repair costs properly, you could get in over your head."

Falling Through The Kitchen Floor

Serial flipper Alan Abrahamsson of Killingworth takes a different approach. He chooses higher-priced properties in prime locations and does most of the carpentry, painting and renovating himself. Any house he and his wife buy to live in, they renovate with an eye toward flipping.

In 2004, Abrahamsson bought a charming 2,000-square-foot, two-bedroom, 1 1/2-bath investment property on North Street in Guilford for $235,000 cash, a few blocks from the town green.

"It was an old house that nobody wanted," Abrahamsson recalled. "About 80 people in two weeks looked at the house and walked away from it. I actually fell through the kitchen floor into the basement when I was renovating. I could have killed myself."

He worked on the house for a year, a complete gut renovation that also included a new driveway, septic system and asbestos remediation.

When it was finished in 2005, the house sold for $425,000, netting Abrahamsson $70,000.

"It's a lot of fun and a great way to be your own boss," he said. "The new owners did not have to do one thing to the place."

In 2006, Abrahamsson and his wife, Fay, bought a 3,700-square-foot four-bedroom, 3 1/2-bathroom home with a pool and extensive grounds for $490,000, intending to live there during the renovation and flip it. The original business plan called for a $120,000 renovation budget and putting it back on the market for $750,000.

Unfortunately, the house flooded and the real estate market turned down, so the Abrahamssons decided to hang on until the market improves. In the meantime, Alan Abrahamsson opened a renovation business, Design Enterprises, to fix up other people's homes.

Despite the potential pitfalls, the Abrahamssons remain optimistic. Eventually, they would like to downsize to a smaller home and do a flip on the side.

More Stringent Loan Terms

New Haven real estate agent Mary Jane Burt of The Pearce Co. has noticed "a lot of out-of-towners are looking at New Haven for opportunities to get in on the cheap," though they tend to rent the properties more than they do buy them to flip. Those who invest are buying properties at the low end of the market — $150,000 to $200,000 — if they have access to capital. The expiration of the $8,000 tax credit for first-time homebuyers has contributed to the overall real estate slowdown, Burt said.

Bank loans for investment properties are still possible, but the terms of the loan would be more stringent than for an owner-occupied property, said Edward Steadham, a spokesman for Webster Bank. For example, if an investor with excellent credit wanted to buy an investment property, he or she would pay 2 or 3 points more on the loan than a similar property he or she planned to live in.

On the shoreline, there are very few flips, due to the lack of inventory of lower-priced homes and difficulty getting traditional bank financing, said Karen Stephens, owner of Page-Taft Real Estate. There are bargains, to be sure, but only for cash buyers or those with partners who will stake them some money.

"You will not see crazy appreciation in property values," Stephens said. "We can expect 3 to 5 percent a year, so it's not a great time to flip. The smart investor these days is buying property and holding on to it. It's a timeless way to invest your money."