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What agents need to tell potential buyers about house flipping

A real estate agent’s reputation is their lifeblood, so it’s critical they give the right advice when it comes to flipping houses.

In the current market, flipping is high risk, experts say, yet agents can expect to field inquiries by many potential buyers, tempted by the promise of fast gains.

In the US, spectators had turned to online apps and algorithms to help them flip properties quickly, hopeful of a quick profit, said co-founder of buyer’s agent network BuyersBuyers Pete Wargent, but shortcomings in the models and processes had seen many come unstuck.

According to Mr Wargent, flipping property in a hot market could lead to poor decisions, especially with the high costs of tradesmen and materials.

“Real estate is a local asset, and buyers need to follow a systematic process when buying, ensuring they cover off all of the required due diligence,” Mr Wargent said.

A crucial part of that process will be discussions with their local real estate agent.

“The agent needs to articulate the meaning of the buyer’s property strategy,” Doron Peleg, co-founder BuyersBuyers and CEO of RiskWise Property Research, said.

“This is the case not only when it comes to property flipping, but to other high risk or questionable strategies, such as buying small units in high supply areas,” Mr Peleg said.

Here are some of the top risk factors when it comes to house flipping, according to experts.

Transaction costs risk

The transaction costs involved in buying and selling real estate increase the risks of nominal losses for those looking to flip properties.

Mr Peleg said while the average duration of property ownership had increased over recent years, five to 10 per cent of properties could still be sold for a nominal loss.

“The available statistics show that such losses are often related to the purchase of new property, which subsequently loses value, but also often relate to the resale of properties within a relatively short timeframe,” he said.

Ensure your clients understand transaction costs, such as stamp duty and real estate agent’s fees, which can make buying and selling property in Australia a costly experience.

Favoured property types

Agents should explain the difference in risk profiles when it comes to flipping houses, as opposed to flipping units.

Overall, houses have performed better than units from a capital growth perspective, well-located land being the scarce commodity in Australian real estate, Mr Wargent said.

“In particular there is an ongoing undersupply of desirable houses in the middle-ring suburbs of some of our capital cities, while higher density units have tended to be supplied by the market more readily over the past decade,” he said.

“Attached dwellings with a high land-to-asset ratio in mature capital cities such as Sydney – typically more boutique developments in highly sought-after areas – have also tended to fare well over time.

“Units in other parts of Australia, especially areas where there has been overbuilding, have lacked the same scarcity value, and on average have not performed as well.”

Annual rates data show that where owners have retained property for 10 years or more the risk of loss on resale is dramatically reduced.

Buyers interested in house flipping should focus on properties with a scarcity value, a high land value content – detached houses where the budget permits for the location you’re interested in – and take a longer-term view, Mr Wargent said.

Price deceleration increases flipping risks

The property market is expected to be strong in 2022, but Mr Wargent said there would be no repeat of the rapid price gains experienced across the country in 2021.

“More listings are coming online now, but competition for A-grade properties remains fierce,” he said.

“Even within suburbs and streets there are nuances best interpreted by local market expertise, and a rapidly moving market an expert buyer’s agent offers invaluable insights.”

Statistics suggest a well-executed purchase at the right price, with a properly carried out due diligence process, combined with a reasonable time horizon, will greatly reduce or eliminate the risk of capital loss.

“Agents should speak about the opportunity and potential issues and risks associated with the area, the specific property type, configuration and price point,” Mr Peleg said.

“For investment properties they need to speak about the potential rental return and other costs associated with the property. They should also perform a detailed due diligence prior to purchasing the property.

“Agents should not encourage buyers to enter a deal that is outside their risk appetite and/or does not suit their objectives.

“Regardless to the market conditions, many well-regarded agents rightfully recommend to take a medium to long term strategy approach, instead of property flipping that is considered riskier and more speculative.”

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Nicole Madigan

Nicole Madigan is Senior Journalist and Content Producer for Elite Agent.

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