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A Beginner's Guide to Flipping Houses: Lingo Demystified

Understand the various strategies to make money in real estate by flipping houses.

By Jeanette Joy Fisher in response to readers' questions

The TV show Flip this House spurred a lot of interest in making money in real estate by flipping houses. However, the show only tells part of the story. Often, the viewer never gets to know if the renovated house sells or not. How can you learn about making money flipping houses if you don't get the entire story on how much profit the investor made? Also, the investors rarely get their hands dirty and hire out all the remodeling, which costs a lot. Another reality show scheduled for The Learning Channel, Property Ladder*, also focuses on the "rehabbing" side of flipping houses. In this show, the investors do the home remodeling themselves instead of hiring outside help. Let's hope the new show gives us more details on costs, profit and loss. To many real estate investors, the type of real estate investing these reality shows feature is termed "rehabbing" or fixing a "fixer." Flipping Houses: Terms Explained Old-school investors think of "flipping houses" differently. They think of a "flip" as a house (or just its purchase contract), which is purchased below market value for a quick resale. The house may never transfer title into the investor's name. These investors look for sellers under duress to sell for 70 percent or less of market value. The house may not even need fixing. When the house or purchase contract sells to another party, possibly another investor "rehabber," the "flipper" pockets quick cash. The flipper or "quick turn" investor may never even "invest" any of his or her money into the purchase. Quick-turn investors look for many "flips" to do each month and like to make $5,000 to $10,000 or more on each house. The "rehabber," who fixes many houses each month with a team of contractors, may or may not do some of the actual work. Rehabbers who do the work themselves take longer to do a project and do fewer homes each year. If they keep a house for over a year, rehabbers can gain a significant appreciation if the property value increases. Plus, they do not have to pay high income taxes. Investors who sell in less than a year pay taxes based ordinary income. Holding over a year gives investors the long-term capital gains tax break. Also, be sure to check into your state taxes. In California, the state gets the first check out of escrow-- about 3.8percent of the sales price, regardless of the profit percentage. Investors need to wait until they file tax returns to get the money back. Many investors specialize in "foreclosure REOs." Investors who specialize in "Pre-Construction" also flip houses. They gamble that a builder's home will appreciate in value upon completion. Some builders require that an investor keep the home for over one year to keep speculation from harming the home buyers who intend to live in the home. (See "How to Make Money in Real Estate without the Scrunch Work:" Pre-Construction) I hope this article cleared up some of the questions sent in by my newsletter readers. Please let me know how you like the Property Ladder show. Joy! Jeanette Copyright © 2006 Jeanette J. Fisher *Tune in to Property Ladder Saturdays at 10 p.m. ET/PT starting June 4. Real Estate Investing Business Plan Get all the tools you need to start your real estate investing business.   Return to Real Estate Investing Articles

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