What Is a Flipper?
A flipper describes an investor who buys a stock, often at an initial public offering (IPO), in order to sell it for a quick profit. A flipper may also refer to somebody who buys and sells homes or properties for quick profits, often after refurbishing them.
- A flipper, generally, is somebody who purchases an asset or investment for a very short period of time, hoping to sell it for a quick profit.
- In stocks, flipping is most associated with IPOs, whereby buyers at the IPO price turn around and sell it on its first days of trading, hopefully at a higher price, in the stock market.
- Real estate flipping involves purchasing properties, often to renovate, and re-sell them, often in a period of a year or less.
Stock flippers may hold a stock for as little as 24-48 hours, and they are therefore exposed to short-term upturns and downturns in the market. Unlike long-term investors, who typically ignore short-term ups and downs in the market, these short-term investors depend on these sudden market shifts to make their profits. With IPOs, it is institutional investors who are most often given the chance to purchase shares, and often they engage in flipping.
Because of the risk of flipping by company insiders, IPOs will restrict company owners and early investors from selling their shares until a lock-up period has transpired, often several weeks or months following the IPO date.
Real estate flippers often buy rundown homes at low prices and renovate them in order to sell them at much higher prices. Typically flippers face a host of challenges. These include problems with borrowing, insurance, renovations, inspections, and market conditions. All of these present hazards that can make profitability a challenge unless skillfully managed.
Risks of Real Estate Flipping
Flipping is most strongly associated with real estate, where it refers to a strategy of purchasing properties and selling them in a short time frame (generally less than a year) for a profit. In real estate, flipping usually falls into one of two types. The first type is where real estate investors target properties that are in a rapidly appreciating market and resell with little or no additional investment in the physical property. This is a play on the market conditions rather than the property itself. The second type is a quick fix flip where a real estate investor uses his knowledge of what buyers want to improve undervalued properties with renovations and/or cosmetic changes, known as a reno flip.
Flipping has made fortunes in real estate, but it does seem to spawn more infomercials than it does easily replicated results. Flipping in a hot market is the riskier of the two, as hot markets can cool unexpectedly. If market conditions change before the property can be sold, then the real estate investor is left holding a depreciating asset. Flipping after improving an undervalued property is less dependent on market timing, but market conditions can still play a role.
In the reno flip, the investor makes an additional capital infusion into the investment that should increase the property value by more than the combined cost of the purchase, the renovations, the carrying costs during the reno, and the closing costs. Although flipping sounds simple and straightforward in principle, it does require more than a casual understanding of real estate to be done profitably.
Flipping and Wholesaling
Depending on your perspective, real estate flipping can also encompass wholesaling. In wholesaling, a person with an eye for undervalued (and therefore flippable) real estate enters into a contract to buy a property subject to an inspection period and then sells the rights of the contract to a real estate investor for a fee or percentage. This is a more formalized relationship than with a traditional bird dog, and the property in question may or may not be flipped by the eventual buyer.
A wholesaler is not limited to looking at properties solely for the purpose of flipping. Wholesalers also scout income properties and longer-term appreciation plays for real estate investors.