Picture this! You have been working your 9 to 5 job now for several years. You have been thinking about how you can escape the routine and do something different with your life. One of your favorite channels to watch is HGTV. You see all these people get filthy rich very quickly buying old, run down homes, fixing them up and then selling them for a major profit. It looks easy to do! Why not just take some of your savings to become a regular “flipper.” You can buy one or two while still working the full time job and do the flipping part time. Once you have enough cash flow coming in, you can reverse the two (working part time and then flipping full time) or even quit your full time job altogether.
It sounds like a great dream!. You only live once. However, before you make the leap into the world of flipping homes, there is some things you need to learn and plan so you can makes sure that you business will be a success. As a quick introduction to the subject, and give you some high level concepts to further explore, please find some frequent questions to consider before you invest in flip properties.
Here are the questions to consider before you invest in flip properties.
Do I have enough cash, or good enough credit, to afford to be a flipper?
Despite the claims, you really do need money to flip homes. Cash is always king when it comes to any kind of financial transactions. With flips, it is even more important. Most sellers in today’s market will be looking to take advantage of the conditions and sell their home fast with no delays. Financing a deal for a house can be a huge time vacuum as you have to wait for a lender to verify the buyer has the financial chops to afford the flip. With cash, you get through the option period and then quickly close on the house. Sellers love this and most will opt to go with a cash offer over a finance offer. On the other side of the coin, finance deals do still get done and some sellers will wait out the lender if the offer is higher than the cash offer. Of course, you do have to qualify for the loan, whether is is a traditional one or a hard money one, so if your cash reserves and credit are bad, you might still have to wait for the financial picture to get better before you invest in flip properties. Don’t forget also that you have to have money to do the property rehab after purchasing the property so plan accordingly.
What do I really know about rehabbing homes? What experience do I have?
It might seem that the experience you need for rehabbing homes can be limited to succeed at flipping homes since you could just hire someone to be the general contractor, but it really does help to oversee the rehab if you have some past experience. Most general contractors will be busy and juggling several projects at once. It is up to you as the boss to make sure the work being completed and is being done correctly. Of course, if you are doing the rehab yourself, you will definitely need some skills and experience. If you don’t have the full experience of rehabbing all parts of a property, then it is best to hire someone to do it for you. There is nothing worse than seeing shoddy work in a flip when showing the property to buyers. Buyers will immediately realize the flipper didn’t know what they were doing and might have not any faith the rest of the property was done properly, or something major was overlooked. Don’t risk throwing away your entire project on your pride! Hire an expert!
How do I find properties marked at discount prices?
There are two main ways to find properties at discount prices. You can hire a realtor to find properties for you marketed through the Multiple Listing Service (MLS). Flip properties do exist on the MLS, but you have to have an agent that knows how to find flip properties. We have a flip worthy program here at Integrity 1st Real Estate and specialize in finding flip properties on the MLS. The second avenue is to hire a wholesaler to bird dog some properties for you on the off-market scene. Wholesalers have a business model where they will seek out property owners, who are looking to get their home sold fast without too much hassle. The wholesaler puts their property under contract and then assigns the contract to a buyer who will pay the wholesaler for the trouble. The wholesaler’s fee is usually added to the sale price of the property. You also have the option of approaching property owners directly to ask if they wish to sell their home and many flippers will do this. You have to sit down and figure out if paying the fee to the Realtor or Wholesaler is worth the time savings you realize by not having to prospect properties yourself.
What hidden costs exist when investors invest in flip properties?
Almost anyone who watches the HGTV shows on flipping homes will have an idea of the costs involved with flipping homes. You have the cost of actually purchasing the property and you have the cost of rehabbing the property. However, as with everything else in the world, there is a lot more to costs than these two high level categories. This article from Biggerpockets does a great job of breaking down the various costs of flipping a home. You have to think about the cost of getting the funds if you are financing the deal. There are certain costs that will carry over during the rehab and selling process such as property taxes insurance and utilities. You have realtor or wholesaler fees when purchasing the property as well as realtor fees if you wish to list the home in the MLS. I am also often surprised by the hidden rehab costs after the work begins. If one previously unknown issue is discovered, it will usually result in some other additional work to be needed. There are plenty of calculators out there that can help you tabulate all flip costs, both apparent and hidden, that will go a long way towards giving you a clear picture of costs when you invest in flip properties.
Do I know any good general contractors?
If you don’t plan to do the rehab work yourself, it is always a good idea to get a nice list of possible contractors to call when a flip deal comes available to you. Contractors have gotten somewhat of a bad rap over the years because there are so many of them that downright steal money from clients by not doing the work, or doing unacceptable work. My best advice in this regard is don’t give anything to a contractor that you have not vetted very heavily. Ask for at least three references and pictures of before/after of past jobs. Check with the better business bureau to see if there are any outstanding complaints against the contractor and always do a thorough check online about the contractor. What if you don’t know any? The best way to find reliable contractors is to ask around your sphere of influence. You might be surprised by how many of your coworkers, friends and family know a good trustworthy contractor. You can also check out sites like Angie’s list to get some ideas as well.
How do I know when I have a good deal? What is ARV?
All flippers have their own goals and objectives (or they should) on how much they wish to get from a flip deal. Based on their profit desired, you can work backwards to know what you need to get for a flip house. For example, many flippers will use the following formula. 70% ARV – repairs = offer price. Let’s break this down. The After Repair Value (ARV) is price you will be able to most likely get for the property once you put the rehabbed house back on the market for sell. You can get the ARV from a realtor, who will run a report on some comparable properties that have sold recently within a half mile of the target property. From these comps, the ARV can be determined. Since realtors are not allowed to value homes (this is left to the licensed appraisers), you will usually get a range of the possible ARVs. So, going back to the example formula, when looking for a deal, you want to find a property that is 70% of the ARV so a property that has a ARV of $100K, would need to be priced at $70K with this formula. You then subtract the repair costs from the 70% ARV to arrive at the your offer price. The best way to get the repair cost is to walk the property with your contractor who can give you a ball park figure on costs. Of course, you might have to modify this formula based on your desired profit and the competitiveness of the current market.
What property specs will be more attractive to buyers?
The ideal flip property is one that will appeal to the most buyers possible. You don’t want to get a property that has anything too strange about it, like a strange constructed roof, or unusual floor plan, since most people will not want a house with these unusual features. In my experience, the homes that have three bedrooms, two full bathrooms and two car garage garner the most interest. You want to make sure that you don’t get too small of a house as most buyers will want something larger than 1500 square feet. Even too large of a house can be less appealing to most buyers due to the addiitional upkeep cost. Finally, most flippers will put a price ceiling on their flip properties at $150K because you can spread out the money out to get two or three flips at one time versus one more pricey flip. There are exceptions to these specs, but these are the rules that work for most flippers.
What rehab projects are essential in flipping homes?
Kitchens and bathrooms are always the selling points of most homes. If you have a limited rehab budget, makes sure these rooms get attention. You need to have new floors and professionally done paint job. Curb appeal is also important so don’t go crazy on the inside of the house and neglect the outside. You will turn off many buyers with a bad first impression. I am also amazed at how many flippers neglect the structural issues of the house for the cosmetic side. Buyers today are very astute and will be able to know pretty quickly if the roof, foundation, electrical or plumbing is not up to speed. Don’t waste your time and energy on a flip if you don’t make the house structurally sound in the first place.
How do I sell the home once I have finished the rehab?
This is self serving for us to write this, but the best way to get a house sold today is put a listing on the MLS. You get the most wide berth of coverage when you do this. The MLS is looked at by thousands of agents on a daily basis who all have two to three clients looking for a house. In addition, most MLS associations will syndicate out their listings to all the major portals for you automatically. Yes, there is a realtor’s professional fee involved with listing it in the MLS, but you marketing funds can’t be spent any better than getting a listing in the MLS. Be sure to check out Integrity 1st Real Estate’s services flip worthy program as we work with flippers on the MLS listing fees.