buying "in the hood?"

[Derek Sperzel]

I have been looking for my first house to flip. I have found some great deals, but most of them are in the low income, high crime rate part of town. I am concerned that although I can purchase these houses for a low price I might be stuck holding the property for a long time. I am an experienced DIYer and my brother is a contractor. I know we can handle the rehab, but does anyone have any experience in flipping a house in the "wrong end of town?" Is it worth the risk, and whats the best way to market a house in this situation? Thanks

[David Beard]

Your concerns are well-founded.

A major problem is that there are very few folks in these areas that can obtain financing. The sub-prime mortgage market is dead, and they generally have little cash and poor credit. Foreclosures are also very high in these areas, so your comps get strongly colored, if not defined, by REO sales, so it's hard to get an appraisal that will support your targeted exit price. Search the comps, do you see any bonafide "retail" sales occurring within a couple of miles of your target property recently?? Bet not.

You could possibly rent it out and sell it as a turnkey investment to an unwitting investor from out-of-state, for a large profit. (Just kidding there, don't join the hucksters doing that in lousy neighborhoods.)

Another option is to do lease-options in these areas and get a cash down payment to put SOME money in your pocket up front. However, IMO you have a moral obligation to work with your tenant/buyer and try to get them in shape to refinance at some point, possibly a LOT more involvement than you wanted.

Just be careful not to generalize on an area as a "high crime, low income" area. This is subtle. There are lower income areas that are quite solid, and cash flow like a dream. You can spot the war zones pretty easily, just search using the mapping feature for concentrations of houses for sale under 10-15k (in midwest areas such as we're in).