Flipping Houses – Meaning, Example and How it Works

Flipping House Meaning

Flipping House is the term which is used in the context of real estate market. The dictionary meaning of flipping is to spin or rotate and in case of real estate market, it refers to that strategy by which an individual purchases a house with an intention to sell it for profit within a short period of time which is usually a year.

How Flipping House Works

The flipping house strategy cannot be used in those places where the real estate market is in a slump. In simple words, it works best in those real estate markets where the property prices are moving upwards. Another way in which this works is an individual first purchase an old house than invest some money in order to renovate it and make it look attractive and then sell that house to prospective buyers for the profit.

Flipping House Example

It can be better understood with the help of an example, suppose an individual gets to know that an international airport or mall is coming shortly in particular area of the city and on the basis of that news he or she buys a house for $100000. Now after 6 months an international airport or mall opens and price of house shoots up to $140000 and an individual sells it than he or she will make $40000 profit in six months if one ignores interest rate.

Flipping House Risks

The biggest risk as far as the flipping house strategy is concerned is that real estate price may remain stable or decline instead of rising or for that matter the development due to which an investor has anticipated price rise and purchased the property may not materialize. Hence in the above example if the international airport or mall does not get built in the area than the price of property in that area will not increase leading to locking of the capital of the investor.

As one can see from the above that this strategy is good when real estate prices are continuously rising the moment property prices stabilize or decline this strategy will not work and an individual may have to face loss if the individual has taken a loan for purchasing the house which carries high rate of interest. Hence in other words flipping house leads to the entry of those individuals who instead of purchasing the house for long-term purchase house for speculation purpose leading to bubbles like situation in the housing or real estate market.

 

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