Several years ago, I became friends with a young woman who was just getting started in real estate. She became a real estate agent, and then started learning about renovation. She bought her first house, flipped it, and made a ton of money. Thanks to some exceptionally lucky circumstances, and some serious persistence on her part, she ended up on an HGTV show about flipping houses. She appeared in several episodes of the show, because she was part of an often-featured investor team in Atlanta.
I asked her one day if flipping houses was as easy as it looked on TV. After all, the show made it look very easy. You find a cheap home for sale. Put some money and sweat equity into fixing it up, and then resell the house for a huge profit. House flippers can make enormous profits on a sale. Could it really be that simple? She laughed, shaking her head. “We make it look easy,” she said. “But it’s risky, back-breaking work. It can be fun, but if you don’t know what you’re doing, you’re sunk.”
Enter the world of house flipping.
What Is House Flipping
House flipping is when real estate investors buy homes, usually at auction, and then resell them at a profit months down the road. Can you make money doing this? Yes. Can you make a lot of money doing this? Yes. But you can also lose everything you own if you make a bad decision.
House Flipping Requirements
You can find some real bargains in the real estate market. In fact, there are 1-2 million foreclosed homes for sale right now, and the Wall Street Journal reports that another 7.5 million U.S. homeowners are either behind on their payments, or in the foreclosure process.
Thanks to tighter lending standards, and a depressed buying market, you need plenty of cash, and nerves of steel, to get into house flipping. Imagine buying a house for $50,000, investing another $20,000 in renovations, and then…nothing. No one wants to buy the house. You now have to pay for your own rent or mortgage, plus the mortgage for this home, and utilities, insurance, and property taxes.
So what do you need to get started?
- First, you need an excellent credit score. Lenders have tightened their requirements for home loans, especially if you want a loan for a high-risk house flip.
- You need cash. Use the cash for a down payment, so you don’t have to pay private mortgage insurance (PMI) on your second mortgage. You could also take out a home equity line of credit (HELOC), if you qualify, and if you are buying a cheap house through a real estate auction. If you have enough in savings, and you manage to find a bargain-priced home, you can buy the home, and take out a small loan or line of credit to pay for the renovations, realtor fees, and closing costs.
- You need to know the real estate market. You want to buy a home in a great location, fix it up, and sell it at a profit as quickly as you can. In order to sell the home quickly, it must be located in a great area. The longer it takes to sell the house, the more money you’re going to lose to monthly mortgage payments, and payments for insurance, utilities, and property taxes.
What Makes a Good Real Estate Investment?
So what should you look for in a potential house flip?
- Location. Expert house flippers can’t stress this enough. Find a home in a desirable neighborhood, or in a city where people want to live. In a down market, like the one that exists today, finding a superior location can be a challenge. Start by researching local cities and neighborhoods. Look for areas with rising real estate sales, employment growth, and other indications that the town will rebound from the recession.
- Sound Condition. You don’t want to tear the house down, and start rebuilding it from scratch. Look for structurally sound homes. You may not have the opportunity to have a home inspected, especially if you buy the home at a real estate auction. You need to learn what to look for, or bring someone knowledgeable about building, electric, and plumbing with you to look at the home, to determine if the home is structurally sound.
- Good Schools. Homes in a good school district sell more quickly.
- The Right Fixes. A home with old carpet and wallpaper featuring pink poodles may be easy, and cheap, to update. Other home repairs to tackle might include installing outdoor motion sensor lights, replacing old kitchen linoleum, and replacing hollow doors with six-panel doors throughout the home. A house that has mold, needs a roof replacement, or needs rewiring, requires some serious time and cash to update and sell. Make sure you know which updates and repairs you can afford to fix, which repairs you can’t afford, and which home improvements will increase the selling price of the house. When you estimate the cost of any job, experts advise that you add 20% to the final estimate. Why? It’s always going to cost more than you think it will, say the experts. Always.
- Close to You. You will work on this house daily in the weeks and months to come. Do you really want to work all day, and then drive an hour to get home? Don’t invest in a house too far away from where you live; you will spend more money on gas, and it will take longer to fix up the house.
- Analyze the Kitchen. The kitchen is the most important room in the house. Pay close attention to this area when you buy a house. Most experts recommend you focus on remodeling the kitchen, and then look into bathroom redesign ideas. Analyze how much you will have to spend on the kitchen in order to make it appealing for future buyers.
- Value. Make sure the price of the home is below its value in the local market. Otherwise, you will not make money. Try to buy the worst house in a great neighborhood, versus the best house in a lousy neighborhood. The worst house in a great neighborhood has nowhere to go but up in value, due to the value of the other homes in the area.
Although you can search the web and see millions of foreclosed homes for sale, never buy a home without seeing it in person. This is the biggest mistake new flippers make. Keep in mind, the online photo gallery only tells part of the story: Old photos, an awful neighborhood, and black mold are just a few of the horror stories of foreclosed homes online. Always investigate a property yourself before deciding to buy.
How to Flip a House
1. Get Educated
You can’t find a cheap house online, buy it, and then sell it for a profit. If flipping were that easy, we’d all be real estate billionaires. You must educate yourself before you even start looking at homes. What do you need to know?
- Understand the ins and outs of your local real estate market. Where do people want to live, right now? What kind of house do people want to buy, right now? Don’t speculate about up and coming neighborhoods. Remember, you want this house sold fast.
- Become an expert on home financing options. Will you buy a house with cash? Will you apply for a home mortgage loan, or take out a HELOC? Make sure you understand the ins and outs of home financing before you apply for a loan, or make an offer on a house.
- Don’t avoid the tough questions as you enter the house flipping process. Analyze how much house you can afford, and how much you can afford to lose on any deal.
- Learn how to negotiate effectively. The less money you invest into a house, the more money you can earn during the flip. You also need good negotiation strategies, to haggle with contractors and other workers.
- Know how to spot a good deal. Research landscaping, plumbing, and electrician rates. Find out how much it costs, on average, to recarpet a 1,000 square foot home. You need to know these details to ensure you get the best deals possible.
- Network extensively, and talk to potential buyers before you even start looking for an investment house to flip. Do whatever you can to build relationships with future buyers. If you have a buyer lined up when you purchase an investment home, the house sells as soon as the updates are completed.
- Start building a network of contractors you trust, including plumbers, electricians, and landscapers. You will need one or all of these services when you buy your home. Using professionals you trust saves you a lot of headaches, and money, down the road.
- Know which home improvements increase the home’s value. Focus on these projects first. Home improvements that increase the value of a home might include upgrading kitchen appliances, repainting the home’s exteriors, installing additional closet storage space, upgrading the deck, and adding green energy technologies. On the other hand, avoid home improvements that won’t increase the selling price, like installing a pool, installing a whirlpool bath, or adding a sunroom to the house.
2. Find a Mentor
If you know a successful house flipper, ask him to be your mentor. You might even want to consider offering him an incentive to mentor you. For example, in exchange for his hard-won knowledge and advice, you give him a small percentage of your first profit. This way, the mentor is motivated to tutor you, and you ensure the quality of your education. Offering a financial incentive also enables you to approach experts you don’t know personally, since they will be compensated for their efforts.
3. Research Listings and Foreclosures
Many websites provide foreclosure listings. Some of the most popular include:
Once you find a home you want to buy, check out that home’s background with BuildFax. For $39, BuildFax provides a comprehensive background check on a home. You can review extensive details about the house’s history, including repairs, remodeling, and additions.
BuildFax can help save you money. For example, perhaps you want to buy a home, and the listing indicates that the heating unit was replaced 10 years ago. When you run a report on BuildFax, you learn that the furnace is closer to 20 years old. You can then go back to the homeowner or bank, and negotiate a much lower price.
4. Make an Offer
Once you find a home you like, you make an offer on the home. If it’s a great house selling for a low price, you might have competition. Many people flip houses full-time, and they will likely know about this house too. You can sneak by the competition by targeting a neighborhood, and going door-to-door, making offers.
Before you make an offer, make sure you know the uppermost price you can pay for a house, and still make a profit. This includes your estimate for repairs, interest, and taxes. Remember to pad your estimate by 20%. If the homeowner or bank won’t sell to you for this price, walk away. It’s better to keep looking, than to risk going broke from a bad investment.
5. Get Working
Make sure you know which home improvement projects you can complete quickly and successfully, and which projects will need contractors.
You need permits before you start remodeling. Not having the right permits, or not correctly displaying permits, can cause serious delays, and fines, from city inspectors. Make sure to apply for permits as soon as the sale is final. It’s also helpful to make a timeline for projects, with associated deadlines, and the budget listed for each project. This helps you, and your contractors, get renovations done quickly, and within budget.
6. Relist and Sell
Many flippers end up listing their homes with a realtor. Realtors eat and sleep real estate, have access to buyers, and can list your house in the MLS database. They also know the current market fluctuations, and have the skills and network to get you the best price quickly.
You can also choose to sell your house yourself, without a realtor. You’ll save money in realtor fees, but in an uncertain market, you might end up waiting a long time for the house to sell. In addition, listing and showing a house takes time. If you can’t be available every time someone wants to see the house, and you don’t want to host open houses, working with a realtor might be the best choice for you.
Without a doubt, flipping homes offer great risks, and great rewards. A house flipper must be prepared for the possibility that the home won’t sell right away. House flippers also have to make tough decisions, like whether to accept an offer that is less than they wanted, but still for a profit. If you can handle all of the ups and downs, and you have an enthusiasm for fixing up and selling homes, then house flipping might be right for you.
Have you ever flipped a house? If so, was the profit you earned worth the process and the experience? What upgrades and renovations did you make to the house?
(photo credit: Shutterstock)