Buy a property below market value, renovate it and then make a tidy profit by selling it at a higher price, all within a few months.
It sounds really tempting, doesn’t it? But is it still viable in 2020?
The Flipping Strategy
House flipping (also known as 'fix and flip', 'property trading' and 'fix to sell') for profit is a simple strategy. You find a property that is in need of renovation and you purchase it for a low price. Then you renovate the property to make it a lot more attractive to buyers and sell the property for a higher price.
House flipping is a property investment strategy in the UK (and elsewhere) that has been around for a long time.
The amount of profit that you make from this is a simple calculation: Final Selling Price – Cost of Purchase – Costs = Profit
Here is an example:
Property purchase price: £200,000
Renovation costs: £30,000
Other costs: £20,000
Property sale price: £300,000
From these figures you can calculate the return on your investment (ROI) using the following formula: Profit / Total Investment = ROI
So plugging in the numbers from our example above gives us: 50,000/250,000 = 20% ROI
Is this a good return on investment? As a rule of thumb, experienced property developers use a minimum profit on costs value of 20% when appraising their projects, so this example would be right on the money.
The reason that they choose 20% is because with house flipping there is plenty that could go wrong. Accurately estimating the costs involved is never an easy thing to do. So this value provides you with a margin of error should something go wrong, and you should be left with enough to still make a profit.
If you go for an ROI lower than 20% then your margin of error shrinks and there is a much greater chance of you losing money with your flipping project. Experienced flippers do all that they can to minimise their costs for maximum profit.
The challenges of house flipping in 2020
We are living in unprecedented times. There are two major issues that you must take into account before you make the decision to go for a house flipping strategy right now. These are the impact of Brexit and the coronavirus pandemic.
The general election result of December 2019 did provide optimism about how Brexit will affect the UK property market but there is still uncertainty. Trade negotiations with the EU are going to be difficult and protracted so nobody really knows how this is all going to turn out in the short to medium-term.
With property flipping being a short-term strategy, it is essential that you take short-term factors into account. With the announcement of the Brexit referendum in 2016, the opportunity to make good money from property flipping declined even further.
The flipping strategy had been on the decline since 2004 because the high profit margins achievable, primarily due to the fact house prices were increasing so rapidly, were no longer repeatable.
Many industry experts define a successful flip as one that takes place in a calendar year. So, if you were to purchase your property this month, April 2020, and then sell it by December 31 2020, you would have created a successful flip. I am not suggesting that you wait this long to sell the property, in and out as quickly as possible is generally the key to success.
With Brexit you need to make an assessment of the short-term impact. Will there be issues with negotiations and other factors that will have a negative impact on the UK economy and therefore house prices? This is probably unlikely.
This is already a bigger short-term threat than Brexit. Financial markets have crashed more than once due to the pandemic and house prices will follow. The UK government has introduced a market stimulation package but is this going to be enough?
You need to be aware that the coronavirus will certainly have a short-term negative impact on house flipping. In a recent article from well-known estate agents, Savills, they predict that the Covid-19 pandemic is likely to impact the UK housing market in three main ways:
Only buyers that are the most committed will proceed with their purchases in the short-term. The rest will wait until there is stabilisation in the global markets.
With everyone on 'lockdown' in the UK right now, this will severely hamper buyers and sellers getting together to perform a house purchase transaction.
There is likely to be an impact on the UK economy which will impact affordability for a number of people.
There are also other factors which could arise with the coronavirus pandemic that you need to take into account:
There will be a delay in surveyors going out to properties to assess their value due to the government lockdown – they are likely to down value at the moment because they are nervous about the housing market.
If you are able to purchase a property then finding contractors that will work on it is likely to be difficult due to the current lockdown.
Many conveyancing solicitors are not taking on new clients because they cannot satisfy anti-money laundering requirements.
Some buyers are going to pull out of purchases because they are scared to proceed or because they believe that the prices will be lower after the coronavirus pandemic has calmed down
The coronavirus impact is constantly changing and things are going to get worse in the UK before they get better. Predicting everything that is going to happen and their effect on the property market is extremely challenging at the moment.
The Bank of England has cut base rates to 0.1%, down from 0.25%, in response to the coronavirus pandemic. This does not mean that borrowing will be cheaper. Financial institutions are cautious about the impact of the pandemic and most have pulled out of 95% mortgages and raised loan to value (LTV) thresholds.
The UK housing market enjoyed a really strong start to 2020 but in the seven days to March 22 buyer demand was down 40% according to this Zoopla article due to the impact of the virus. Things are not likely to get any better with the UK in lockdown now.
In a recent BBC article they reported that lenders are now pulling out of new home purchase deals. Those that will offer home loans are likely to do this on the basis of the purchaser having at least 25% equity in their current homes.
In some cases, loan to values (LTV) have been reduced from 95% to 60%.
The government are cracking down on people moving into new homes. This article from Zoopla explains that the new advice from the UK government is to either pull out of property purchase transactions or delay them due to the coronavirus pandemic.
All of this is going to have a massive impact on people’s ability to buy their new home and thus your ability to sell your flip property. A lack of demand will eventually drive down prices and your profits will shrink and shrink.
The UK property market is effectively closed for business right now.
Nobody knows how long the coronavirus pandemic will last for in the UK. If everybody follows the rules then it could be over in two to three months. But if the pandemic is prolonged for whatever reason, this is likely to have an even more serious impact on the UK economy.
The advantages and disadvantages of house Flipping in 2020
With a large percentage of property investors adopting a 'buy to hold' approach these days, why should you consider property flipping in 2020? As with all property investment strategies, there is always an element of risk. Here are the advantages and disadvantages of house flipping as I see it right now:
There are areas of the UK that still have the potential to yield an ROI on house flipping over 20%.
It may be possible to find some real bargains right now and in the immediate future.
You may have to find a property in an area that you are unfamiliar with to achieve your desired ROI.
The coronavirus pandemic has all but shut down the UK housing market for now and nobody knows how long this will last.
Despite the fall in the base rate a lot of financial institutions have pulled out of 95% mortgages and increased LTVs so borrowing is potentially getting more expensive and more difficult.
You could have to wait longer to sell your renovated property.
Some banks have imposed rules where you cannot sell a property that you have not owned for at least 6 months.
The coronavirus pandemic is the biggest threat to a successful flipping strategy in 2020. Brexit cannot be ignored either, so it may be that flipping is not viable in 2020 at all. If the pandemic is over in 2–3 months then it may have a limited long-term impact on the market and house flipping.
But if the pandemic lasts for 6–12 months then it is very likely that there will be a lot of job losses, borrowing will be harder to come by and this will have a major impact on the market and the flipping strategy.
Flipping works best when there is strong demand in the housing market. If demand is down, it is not going to work for most property investors.
However, it does all come down to how well you buy the property in the first place. If you buy it at the right price, you should make money in any market. Anybody can make money from flipping if house prices are rising by 5% a month but only the professional flippers will make money in a declining market.
I think at the moment it is best to play a waiting game, but with both eyes open for potential projects. Thousands of people are likely to have their finances affected by the pandemic and there is a risk that they will be unable to meet their mortgage repayments. There could be good opportunities around the corner to help people out of their financial difficulties.
You need to stay calm while all around you are in a state of panic. Getting your numbers right is essential.
*Harvey Raybould is a property developer and investor, as well as being the founder and managing director of Kent-based Creative Property Group