The rules of buying a home do not change when doing a flip. The important issues still remain; what is the marketability of the subject property (location, market appeal). The mistake that I see most often made by the non-savvy buyer is that they try to buy the cheapest house they can find - forgetting that they will have to find interested buyers for it.
The flipper should always work backwards into the flip - how much can you REASONABLY expect to sell your flip for on the open market, minus the expenses of marketing and renovations. So, for example; if you determine (after consulting with your trusted real estate advisor) that you can sell the subject home for $100,000, and that you expect to have 7% in marketing and closing cost, and have budgeted $30,000 in renovation cost, then paying $60,000 for this property would give you a profit of only $3,000. Don't forget your purchase expenses, holding cost, and your tax consequence for next year.
Due diligence is a term that applies to all of the background investigations you do with the property prior to becoming obligated to buy it. We'll leave the title investigation up to the title company, and we'll pass on the liability to them as well. Performing a thorough inspection of the property is just good business. Walk the property with your contractors. Most importantly, consult with your Realtor to determine where you should place your renovation dollars. He will help you with making the property more marketable to the largest number of buyers. He'll also help you save money. Some renovations will not increase the value of the property, but will make the difference between a marketable and unmarketable home.
Wouldn't it be great if you didn't have to pay any capital gains tax on your profits. Well, you don't. The best flip of all is the one that you hold onto for 2 years. Move into it and make it your primary residence. At the end of the 2 years, sell it and pay no capital gain tax.
