Even the pandemic hasn't stopped people from flipping homes, and if you want to get in on the action, here's everything you need to know.
Increased profitability of resale
Even as the COVID-19 pandemic roils the real estate market, thousands of homeowners are turning a profit by flipping homes.
A study published by real estate agent Hamptons International found that 19,000 properties have been resold during the pandemic.
Interestingly, the average gap between purchase price and resale price has been growing rapidly, from £29,685 in 2019 to £48,190 now.
But how easy is it to make a profit by buying a rundown property, fixing it up and reselling it?
Like many other areas of life, the success or failure of any resale business likely hinges on due diligence.
Finding the best area and property to invest in requires a lot of research, and a good place to start is speaking with a local agent.
Rightmove and Zoopla have tools that allow you to see how much other homes in the area have sold for.
Additionally, you need to have an accurate estimate of how much it will cost to renovate your property so that you can determine whether the renovations will be profitable enough.
“When choosing a property to fix up and sell, make sure you are comfortable with the scale of the project and are aware of the level of work required.
“Don't be afraid to bring an agent along on the viewing to help gauge this,” says Sam Mitchell, CEO of online estate agency Strike.
There are plenty of other costs to consider, adds Tom Scarborough, CEO of multiple property sales agent Movewise.co.uk.
“One of the challenges of property resale is the transaction costs, which is why property resales tend to be limited to cheaper properties with low stamp duty.
“If it's not the only property you own, you'll have to pay a higher rate of stamp duty of at least 3% on your investment, plus estate agent commission of 1.0% to 1.5% when you sell.”
This may explain the fact that most of the resales in recent years have taken place in the north of England, where house prices are lower than in the south.
Hamptons research found that six of the top 10 property resale locations in 2020 were in the North East or North West, with Burnley coming out on top (see final section for more details).
The best way to fund a resale, especially if you’re new to property development, is to tap into your savings.
Don't try to use a home loan or buy-to-let mortgage to flip a property – it's not its purpose and lenders are known to crack down hard on those who abuse their lending terms.
Either way, if the property is uninhabitable (for example, if it has no kitchen or bathroom), lenders won't grant you a mortgage.
However, if you can’t cover the costs of the property and renovations without borrowing, a bridge loan is likely to be your best option.
Unfortunately, these aren't cheap. “Interest rates and loan-to-value ratios vary, with rates starting at around 0.65% per month and going up to around 1% per month,” says Tomer Aboudi, director at property lending firm MT Finance.
In addition to the monthly interest rate, you'll have to pay a fee up front, usually about 2% of the loan amount, and you'll need a down payment of at least 30%, he says.
On the plus side, you won't be locked in for long: “The minimum term is usually one to three months, and most lenders don't charge a closing fee.”
Many first-time property flippers in recent years are landlords who have changed their strategy in response to a significantly less favorable way rental property is taxed.
But this leads many people to ignore the tax implications of reselling, says Michael Wright, director of property accounting firm RITA 4 Rent.
“Many landlords don't realise that renting a residential property to a tenant has a different tax treatment than buying a property, renovating it and selling it. The former is categorised as a real estate investment and the latter as a real estate trading.”
“Simply put, someone selling a property they have let to a tenant will be subject to capital gains tax on the sale, while someone selling a property with the intent to buy, renovate and sell may be subject to income tax and national insurance contributions on the sale.”
Higher taxpayers could have to pay 40% tax on their gains, instead of the current capital gains tax rate of 28%.
Another trap that newbie developers fall into is overestimating their skills, Aboody says.
“A skilled workforce is important. There's nothing worse than trying to save money and cut costs by doing it yourself.”
“Then it often stands out when you try to sell and you may end up having to wait to find a buyer or have to lower the price.”
He added that scalpers can sometimes place too much emphasis on their own likes and dislikes.
“When it comes to renovating and reselling, you have to know your target market and make sure the property will appeal to them, not your own preferences.
“Many would-be investors get emotional about their investment purchases and forget that they are trying to make a profit.
They spend a lot of money on renovations and try to be too unique and different in their renovation choices.”
While many flippers have done extremely well this year, there also seem to be a lot of reasons why it's hard to turn a profit, so if you're thinking about getting into flipping, make sure the numbers are really right before you take the plunge.
In the spotlight: UK hotspots
Burnley has been the top destination for property resale in England and Wales for several years.
According to Hamptons, 8.2% of homes sold in Burnley in 2020 were resold, and of these, 81% were bought for less than £40,000. This means buyers did not have to pay stamp duty, as stamp duty is only charged on properties over £40,000.
“Burnley is still a great place to find a bargain, with properties currently selling at auction from £20,000,” says James Hogan of estate agents Yopa.
“Fundamentally, this is a great town for first-time home buyers and homeowners, but these buyers often want properties in great condition that are ready to move into.
“So, any blighted property we have here represents a great opportunity for someone who has the time and means to resell it.”
He says there is a wide price range in the town, with terraced houses in good condition ranging from £60,000 to £150,000, so he advises people unfamiliar with the area to speak to as many local estate agents as possible to get an idea of the potential resale value of any project they are considering.
It's also a good idea to contact local attorneys and property management companies to see if there are any probate sales available, he says, because these properties are often prime candidates for renovations.
He adds: “Estate auctions are also a great place to find properties that need repairs.”
“This is a quick and decisive way of disposing of property, so you will often find that abandoned properties are sold in this way.”