Nearly everyone in America has seen at least one house flipping show on TV. Of those who have, most believe that it must not be too terribly difficult. If it were, those on TV making all of those stupid mistakes wouldn’t be making money. And because of those shows, many decide that they, too, can flip houses.
Although it is exciting that the real estate investing market is mainstream enough to produce TV shows, these shows do not tell the whole story. In fact, if you solely rely on what you glean from an episode or two, you will swiftly head to failure.
So, today, I’d like to offer you seven things that you aren’t likely to see on TV but will help you successfully flip homes. I’ve learned lessons because I’ve flipped homes. Many of them. All kinds of homes, from tiny to huge, from cheap to expensive, from cosmetic rehabs to completely gutted renos. I enjoy flipping homes and have found that this can be a great way to make money. On the other hand, I’ve also experienced the stress and not-so-fun surprises that can lead to principal loss.
My hope is that you’ll take your desire to flip homes and add that to the lessons I’ve learned along the way, so that you may find great success.
1. Research the Market Thoroughly
From experience, I know that it is possible to flip properties when the market is hot and when it is not, both when it is up and down, and whether a buyer’s or a seller’s market. You don’t need a specific type of market to do a flip as long as you KNOW the market in which you are operating.
For instance, in a hot market, one in which a house stays on the market 30 days or less, you might assume that the property your purchase will sell quickly – under 30 days – because that is what is happening in this area. Although this seems like a good assumption, quite the opposite could happen.
Why? Think about it – you aren’t the only investor who sees the hot market and plans to sell quickly. In fact, there are likely quite a few investors out there with that thought, and all these newly renovated homes will hit the market at the same time. Now, the property you have for sale is just one of many. Before you know it, 30 days becomes six months, and your hot market has turned stagnant – a market that takes a long time for homes to sell and few rehabs take place.
If you didn’t plan on holding the property that long, then each day you hold the home, you are eating into your profit margin.
- Always pay attention to the price you pay for a house, no matter what the market.
- Always pad your numbers to account for unforeseen issues that come up during rehab.
- Always plan on holding a home for several months, even if the market is currently hot.
2. Know Where to Find the Right Deals
In order to find the right deal, the first thing you have to find an area that is right for flipping. To be a “good flip area,” you need to be able to:
- Buy low
- Rehab easily to bring the home up to what the market expects
- Sell at a strong price
- Have a large number of potential homebuyers
Typically, such locations have things like a great school system, strong income, and/or proximity to stable neighborhoods. Additionally, we aim our purchases at the first-time homebuyer because there is a strong demand for these homes. To do this, we find areas with after-repair values (ARV) below $300,000.
How do you know if you have the right house? If it is the most run down, ugliest property at a great price in an otherwise decent neighborhood, you may have found a good flip.
Once you have an area in mind, there are many different ways to find the right property. Here are just a few:
- Investor-friendly realtors
- Knock on doors
- Locate areas that are right for first-time homebuyers and have the right amenities.
- Don’t wait for someone to put their house up for sale. Knock on doors and create your own leads. The best deals usually come this way.
3. Understand Your Buyer
Imagine if you were starting a clothing business. The first thing you would want to do is know who you are selling clothes to. Why? Because your clothing line depends on the buyer. Few sixty-year-old women are going to buy low-cut jeans with holes and few teenage girls are going to buy a dress with matching blazer. The same holds true when buying properties to flip.
- Who is going to buy in that neighborhood? Are they young? Old? First-time buyers? Families? Millennials?
- What are they looking for?
- What is selling in the area?
- What amenities are real estate agents listing to attract buyers?
- What finishes are they using?
- What is the price range of the homes?
Learning the answers to these questions will help you understand who your customers are, what they want, and what they are willing to spend to get it.
- The type of renovation you do to a home must meet what the buyers expect to find in the neighborhood.
- Different renovation strategies work in different areas – be sure to pick the right one.
- Always look at your competition to determine the answers to “who is my buyer” and “what does my buyer want?”
4. What Properties Will Compete With Yours?
Understanding your competition is almost as important as understanding your buyer. If you don’t know what else is out there to tempt the buyer, there is no way you can market your property to be as good as or better than others for sale.
To understand the competition in your marketplace, you need to research:
- Properties currently for sale
- Properties currently under construction
- Properties sold within the last six months
- The average after-repair value (ARV)
- The average days on the market (DOM)
- How much inventory is in the area
- The realtors working in the area
This research will help you determine whether the numbers work with the property you find.
- If you don’t know your competition, you are more likely to buy the wrong house for the wrong price and try to sell it at the wrong price to the wrong person.
- If you want the help of a realtor to sell the property after renovation, knowing who is selling in the area will help you find one that really understands the marketplace.
5. Your Team Matters
As Steve Jobs said, “Great things in business are never done by one person; they’re done by a team of people.”
Without a doubt, this applies to flipping homes. I do not know of anyone who can successfully flip a home without a team. Sure, not all teams have the same members. For instance, someone who plans to do the renovation may not need a contractor, but they will need team members at other points in the flipping process.
Forming the right team is key to success. Here are some of the most important team members to consider:
- Financers – These can be private money lenders and/or bankers who will help you finance the flip. Private money lenders can typically get you the money quickly, have a lot of flexibility, and are for short periods of time, however, it can be quite expensive. On the other hand, banks can provide longer-term loans at lower interest rates but tend to be time-intensive and have more lending rules. Which type of financing you choose will depend on the situation.
- Hard Money Lender: This type of lending is even more costly, but moves quickly, in as little as three to five days. This is perfect for situations where time is critical.
- Wholesaler: These are individuals who put together great deals and then look for investors who want those deals. Having a wholesaler who knows your needs and understands that you are actively pursuing properties will put you at the top of the list when potential deals come along.
- Realtor: This team member can play two roles – finding good deals and helping you sell a property once renovated.
- General Contractor: Having a reliable and honest general contractor can make or break a flip because the biggest cost besides the original purchase price is the rehab.
- Insurance Agent
- Create financing relationships long before you find the deal. Having options allows you to pick the right financing to make the numbers and deal work.
- If you want a wholesaler to continue to bring you deals, don’t waste their time. Review all potential deals quickly.
- To keep a wholesaler happily engaged with your team, find ways you can help them with their business.
- Don’t work with real estate agents that are not investor friendly. This means they should work regularly with investors and/or be an investor.
- Find good general contractors by driving around the market area and finding those doing rehab projects. Check out their work. If it is quality work, give them an interview.
- Always stay in communication with all of your team members. In addition to providing their given skill, they may also provide you with your next deal.
6. Crunch the Numbers, Then Stick to the Numbers
Before making an offer, you should use the right tools to analyze the deal. These can be:
- Excel spreadsheets
- Other tools
When analyzing deals, be sure to include everything, even those things you don’t see listed on TV. This could include such things as:
- Terms and fees for loans
- Closing costs
- Transfer taxes
- Carrying costs
- Capital gains taxes
Once you know your numbers and have decided to purchase the property, the next thing you need to do is stick to the numbers. You will need to manage the entire process so that you know if you are still on budget. Once again, we recommend that you use the right tools to manage your projects so that you know how much money is going out, what it is being used for, and how this affects the rest of your rehab.
Always, always add in a financial cushion. You can count on some portion of the rehab costing more than you thought. Or a nasty surprise popping up when you demo the bathroom. Or a property that doesn’t sell as quickly as you thought.
- When analyzing the numbers, always be conservative, even putting in worst-case scenario numbers. If it will work with those numbers, then it will work with something that isn’t so bad after all.
- A good deal has nothing to do with feelings and everything to do with numbers. If the numbers work, the property is a good one for flipping. If the numbers do not work, then you should always walk away.
- If you are doing more than one project at a time, use separate bank accounts to make money management easier.
7. Contractor Management
As I said in the “Your Team Matters” section, finding a great general contractor (GC) is key to your success. The wrong GC can turn your investment into a nightmare. However, the wrong policies and procedures, or lack of policies and procedure, on your part, can also create enormous headaches and make managing the general contractor and finances nearly impossible.
So, here are some things you need to do to make this go smoothly:
- Have a contract: Never start a job without a contract that is signed by both you and the GC.
- Attach a scope of work: This is a detailed description of the work to be done. By detailed, I mean you should write down everything to avoid change orders and the extra costs associated with them. This scope of work should be signed as part of the contract.
- Pre-select materials and finishes: By including the item, quantity, model, and picture, along with a link to the supplier and its cost, you will be sure to get what you asked for.
- Agree on a payment plan: Typically, the payment plan is a deposit, several construction phases, and a final payment once the property receives the certificate of occupancy (CO). Always state that the GC will get 100% of the money due at any particular phase only when that phase is 100% complete.
- Agree on scheduling: Have regular meetings with your GC to determine where they are in the process, what is coming up next, and how long that should take. It might be useful to use an app to keep track of progress.
- Having all your policies, procedures, and payment schedules known from the onset of the project will help make everything run more smoothly.
- If something is not written down and signed, there is no agreement.
- Be realistic in terms of scheduling – sometimes things like weather or other issues beyond the control of the GC can delay a project.
- If you feel you have to check in on your GC every day in order to keep things on schedule, you have the wrong GC.
Although the flipping shows on TV are fun to watch, they are not realistic. They do not show the mundane aspects of flipping that are critical to the success of the flip. By following these tips as you flip homes, you are much more likely to find the success you seek.