So you watched HGTV for a couple hours and got the bright idea to start flipping houses. You think “That doesn’t look so hard.” Although it’s not as easy as they make it look on TV, you can make money flipping houses if you know what your doing. Here are the basic 6 steps to flipping a house simply put for beginners.
There are many different options and strategies to use to fund deals. Different types of lenders, loans, terms, ect. There is a saying in real estate that is “If you can find a good deal, you shouldn’t have a problem finding a lender to finance it.” But this isn’t true for everybody. Most lenders want to know if you have “skin in the game” and have some experience.
Once you have a few fix and flips under your belt, more financing options will open up. With that said, it’s probably best when your a beginner to find out how your going to finance your first. Find out how much you can get. Once you determine that, you can start looking for deals.
Finding deals can be difficult, especially in a competitive market. Knowing what to look for is the first step. You are going to want to look for properties that are distressed or homeowners that are distressed, or both.
Distressed properties are the ones that need a lot of work, repairs, and are not that appealing for the average homebuyer. Distressed properties often come with have distressed homeowners. Often there is a reason for why their property is distressed. Maybe they can barely pay the bills as it is so they can’t pay for the repairs.
The homeowner could be facing foreclosure and willing to sell, but nobody wants to buy the house in the condition it’s in. They might not even live in it at all. The homeowner might have died and the family now has it and doesn’t know what to do with it or maybe the homeowner moved out of town and just hasn’t sold the property because of the condition.
What you do as someone that flips houses is to find these distressed properties and the distressed homeowners and give them an offer. Offer to take the hassle and burden off their hands in return for a profit. It’s that simple.
Now just because a property is distressed, doesn’t always means it leads to a deal. It is just a “lead” until you can determine wheather or not it is a good deal for you. The only way to do that is to run all the numbers. Also a mistake that a lot of new investors make is that they buy cheap properties in bad neighborhoods thinking that they are a good deal. Housing prices are determined differently than any consumer good that you might buy from the store. The price of real estate is determined by the market. That’s why the price of real estate goes up and down so much because it is heavily set by the market conditions of supply and demand that are complicated by a number of factors like location and socioeconomic reasons.
After Rehab Value (ARV)
The main goal in analyzing a flip is to find out how much the property will sell for after repairs are made. This is called the After Rehab Value or (ARV). This is determined by looking at what similar properties that aren’t distressed have sold for recently in the area. Then based off those averages, you will have some idea for how much the property will sell for after you fix it up.
Then you have to estimate the rehab costs. You don’t have to be super accurate at this stage, but you do have to have a ballpark estimate within 10-20% of the final rehab estimate that you will get an accepted offer during the due diligence period. For more on estimating rehab costs see my post on estimating rehab costs.
Then you determine your fixed costs which is all the other costs involved such as transaction costs, commissions, inspections, holding costs, and any other fees you will have to pay.
The final step to analyze a deal is to determine how much your profit should be given the risk. The high-end more expensive markets have the most risk/reward. If you are flipping in a low-end market don’t expect to make $150,000 in profit off one deal.
Subtract all the costs and your profit from your ARV to determine your max offer.
In the offer contract, you will want to include clauses that protect you. A home inspection using a good home inspector is a must. Also include clauses for termite inspections and anything else that will protect you from the unknown. If the house has issues you could use them to negotiate a lower price to fix them or walk away.
Once you get an offer accepted, you will thoroughly have the house inspected during the due dilligence period where everything is being processed. During this period, you will want to use the time to get everything lined up to start the rehab after you get to the closing table.
Try to present the offer to the seller by being upfront and honest with them. Explain to them that you are an investor and how you can relieve them of they’re problems. If you are using a real estate agent they can help you with the negotiations but it might be best to speak with the homeowner in person. If it is a foreclosure that you are buying from the bank then you wont have to negotiate with a homeowner you simply put an offer in.
This is where the general contractor comes in. The GC manages the rehab to make sure everything goes smoothly and done on schedule. If you have some construction experience and know how to manage a rehab from start to finish then you could be your own contractor.
Rehabs hardly ever run smoothly that’s why it is important to know how to hire contractors. Unexpected obstacles will come up that you didn’t plan for and that is the risk involved in flipping houses. You try your best to mitigate the risk, but things happen. Just keep learning and improving the way you approach things so that the rewards outweigh the risk.
Your all done with the rehab, the house looks great, and your ready to sell. Some investors like to manage the selling process. Personally, I recommend using an agent to do all the time consuming paperwork, listing, and talking with potential buyers.
Building a relationship with a good real estate agent will pay off in the long run. If you help your team they’ll help you. Up the incentive to sell by throwing in a bonus for selling within a given amount of time. This could be a fixed amount or a percentage. The bonus can be set in the agent’s agreement. Set it for a time period of under 60 days or whatever you want. When the house sells, go to the bank to cash you check. Celebrate your victory with an ice cold beer.
In summary, just try to find what works for you based on your situation. As you get more deals under you belt, you will get better at it. You will learn how to better mitigate the risks to better reap the rewards and perfect your strategies. If this article helped you out in any way, leave a like or comment below.