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House flipping is essentially the task of purchasing a low-cost property, making necessary renovations, and selling it for a profit a few months later. It can be a very lucrative investment opportunity with benefits including a quick turnaround and, therefore, a fast profit.
However, TV shows often make it seem easy, and that's far from the case. In fact, there's a substantial amount of risk involved in house flipping. It's one of the riskier investment opportunities available, and if you're not careful you could lose everything.
Taxes and repairs can cut into your profit, poor financing choices can lead to debt and negative ROI, and your dream of flipping a home could soon turn into a nightmare.
That being said, with proper guidance and planning, house flipping can be a feasible and beneficial investment. Here are just a few of the considerations you need to take into account if you're thinking about trying your hand at house flipping in Arizona.
2019 Arizona Housing Market Analysis
Arizona is a hot real estate market that just keeps getting hotter. It's a seller's market, which is great for investors since there are many people looking for homes to purchase. While this can sometimes make finding and securing a property challenging, with expert help from a real estate agent, you can still find a great deal.
The median home value in Arizona is $252,300, with a one-year growth forecast of 4.8%. The median list price is $286,495 and the median sale price is $235,800. However, these are only averages. These numbers can vary greatly from city to city.
For instance, the median home value in Tucson is $164,800 while the median home value in Scottsdale is $421,200.
Would-be house flippers should partner with an experienced, local real estate agent who knows the market inside and out and can act as a guide and advocate through the buying and selling process.
How to Tell if an Arizona Property is a Good Investment
There are several things you should look for when determining whether or not a property is a good investment.
First, it's a good idea to see if the property has any zoning issues or liens. If it does, you should probably move on and consider other options.
Second, it's important to have realistic expectations. While TV shows can make renovations and house flipping seem easy, it's hard work. It's best to start with a smaller property, even if it's not the most glamorous, and build up. You can always expand your portfolio in the future. Be conservative, gain the necessary experience, and then scale.
Third, see if it's possible to find a buying price below the value assessed by the county. The reason for this is that fair market value is usually determined by adding 10 to 20% to the county's assessed value. Buying under that value, then, is as close to a guarantee of a profit as you're likely to get in this industry.
Finally, look for general indications of a desirable neighborhood such as good school districts, quiet areas (or areas with an atmosphere that suits your target buyer), and low crime rates.
In Arizona, specifically, you want to make sure the property is free from common geological hazards. Is the area prone to flooding? Is there problem soil nearby?
The repeated swelling and shrinking of soil often leaves a “popcorn” texture characterized by large cracks and almost hexagonal shapes in the ground. If you see this type of soil near the home, it can indicate that the foundation is susceptible to major issues.
Cracked driveways and swimming pool areas are also dead giveaways that there might be a soil problem. Later on, these soil deficiencies can pave the way for foundational collapse, so be sure to avoid properties with these characteristics — or at least get it checked out by a professional appraiser.
Another hazard to be aware of in Arizona is radon exposure. Radon is a radioactive element produced by decaying uranium. It's often in the soil and air in some parts of Arizona, and it can have disastrous effects on the health of humans and animals alike.
Mining activity is often responsible for the presence of radon, so this is of particular importance if your property is near an old mine. Make sure radon detection is part of your appraisal to make sure you're selling a safe home.
The current condition, cost of repairs, and comparative market value are also important to consider when evaluating a property.
There's a lot to take into consideration, so you'll definitely want to partner with an experienced local real estate agent who is knowledgeable in flipping houses in the area.
How to Turn a Profit When Flipping an Arizona House
There are lots of ways to make a profit, but none of them are guaranteed. That being said, following some best practices in the industry can help put you ahead of the game so you can benefit from a competitive advantage.
Learn Your Market
Be sure to put in the research necessary to understand what people in your chosen Arizona market want in a home. It's important to partner with a local real estate agent who is experienced in the area and, if possible, is also experienced in flipping homes in the area.
Real estate agents know the market inside and out and can help you make the best decisions. You can't afford to speculate when you're making high-risk investments, so be sure to have a professional guide throughout the process.
Know Your Financial Options
Properly planning your finances is essential when you're looking to flip a home. It's also important to be clear on the financing options you have available and which ones are right for you.
Follow the 70% Rule
In house flipping, there's a general rule that can help you understand what you can afford to spend on a property. It's called the 70% rule, and this is how it's usually laid out.
As a rule, investors shouldn't pay more than 70% of the property's after repair value (ARV) less the costs of repairs to acquire a property.
The formula looks like this: Max Investment = ARV(0.70) — Repairs
In Mesa, the median home value is $240,300. If you plug that into the formula, you can get a decent estimate on what you'd typically be looking to spend on an investment property to flip. Let's assume repair costs of $20,000.
$240,300(0.70) — $20,000 = $148,210
The maximum you'd want to spend on a property in Mesa with these metrics, then, is $ 148,210.
While there are exceptions to every rule, you'll want to stick close to this one in order to avoid ending up with a negative ROI.
Make sure you leave time for all the phases of the flipping process. Consider how much time you'll need for repair, the average time required to flip (about 150 to 190 days), and other similar factors. Also, make sure to take the time to understand your financing options.
Paying Cash vs. Taking Out a Loan
Once you find a property you want to flip, financing the purchase is going to be one of your main priorities. There are a few main routes that investors take when financing that initial down payment and the subsequent repair costs.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a credit line that borrows from the equity in your home. You receive a flexible credit line, and so long as you haven't maxed it out you can utilize it whenever you want for whatever purchases you want to use it for. Since it's not a lump sum, many people like to use this for repair costs since those can be difficult to estimate.
Home Equity Loan (HEL)
A home equity loan is similar to a HELOC, but instead of taking out a credit line, you're taking out a lump sum that looks more like a typical loan. This fixed amount can be useful for purchases or costs that are fixed in value. For this reason, many investors like to use a home equity loan to fund a down payment on their investment property.
Cash Still Wins
While funding with an equity-based loan or credit line is possible and feasible, it's also incredibly risky. Cash is always the safest option for financing an investment property. House flipping is an inherently risky investment in the first place and adding debt to the equation, especially when using your home as collateral, can make for a precarious situation.
Try to use cash whenever possible in order to avoid winding up with a negative ROI or substantial loss.
5 Best Cities in Arizona for House Flippers in 2019
If you're ready to start looking for a property to flip but you don't know where to begin, you're certainly not alone. It can be a daunting task to know wherein Arizona to begin searching for a property. However, getting into some of the fastest growing and most promising cities in the state can help. Here are five options.
Mesa is a growing market that offers potential house flippers a great opportunity. The median home value is $250,800, it's seen a 1-year growth of 8.1%, and the one-year forecast is 6.0%. In Mesa, the median listing price is $265,000 and the median sale price is $240,300 with each home spending an average of 63 days on the market.
Tucson is close to city life but still suburban enough and close to nature to make it feel like an oasis. The median home value here is $187,800, the median list price is $219,900, and the median sale price is $194,900. The Tucson market has grown by 5.8% in the last year and is expected to grow by another 3.8% in the coming year. The average Tucson home spends 69 days on the market.
Phoenix offers families and individuals a lot to do. It's close to just about everything, but still quiet and has a suburban feel for those who don't like a chaotic atmosphere. The median home value here is $242,300 with a median list price of $276,500 and a median sale price of $222,700. The market in Phoenix has grown by 7.5% in the last year and is expected to grow another 5.4% in the coming year. The average home here spends 74 days on the market.
Peoria Arizona is a nice, quiet town with scenic views and nature activities. The median home value here is $279,400, the median list price is $329,900, and the median sale price is $268,300. The market here has experienced a one-year growth of 6% and is expected to grow by another 5.5% in the coming year. The average home here spends 72 days on the market.
Glendale is close to city life but far enough away to be peaceful, as well. The median home value here is $232,700, the median list price is $249,900, and the median sale price is $221,700. Glendale's market has grown by 7.1% in the last year, and forecasts say that it will grow another 5.2% in the coming year. The average home here spends 69 days on the market.
Next Steps for Arizona House Flippers
There are many critical considerations to make if you're considering flipping a house in Arizona. Flipping a house can be a lucrative investment, but it's also an investment that carries high risk. It's important to research your local perspective market and evaluate your own financial situation. Choosing the proper funding options can make the difference between success and failure, and consulting with the professional real estate agent can help you make the right decisions and set you up for success.
A local, experienced real estate agent can guide you and advise you throughout the entire buying and selling process. Especially when it comes time to sell, Clever Partner Agents work for a fraction of the typical commission rate which helps you maintain the highest possible margin on your flip. This can also help you bring in a great price and ensure that the sale goes through without a hitch.