Flipping Houses, not a big deal.
If you watch much TV, Flipping Houses is not a big deal. It all happens in 30 minutes, so it must be easy. What’s to know … you buy a house cheap, slap some paint on it, put some new cabinets in, mow the yard and sell it for a profit. Unfortunately, in the real world, flipping houses is not that easy.
If you are serious about flipping houses there a few things that you need to have in place before you start your own reality TV show. First off, not every flip you are going to sell is going to pocket you a big reward. Below are 5 essentials that every investor or flipper should have in place to have a chance in the endeavor.
Flipping Houses is a Team Sport
1. A team
Take it from me, it is encouraged that you find a team of trusted individuals to make your project a success. Can you do it alone? Yes, you can, but if you don’t want your profits eaten up in financing costs (if you do finance) it’s best to get your project completed as quickly as possible.
Your team needs to include: a real estate agent, an attorney, a contractor, a banker or investor, an insurance agent, a home inspector, and someone to keep an eye on the books and your bottom line. House Flipping is a team sport.
2. Some Skills
You may not be a seasoned finish carpenter, but you do need some type of DIY skills. Even if you are just really good at house painting, it will help you with your bottom line and save some bucks. It seems like the folks on TV know how to do demo, but don’t be fooled even demo takes some knowledge. Oh, and while I’m here. You don’t have to totally destroy every cabinet in the house on demo day. It’s true some of the older cabinets were built on site and have to get sledged. If you take a little extra time, you can take the cabinets down and recycle them or donate them to groups that do renovation for Senior adults or for the less fortunate. In North Texas, I would contact a organization like Hearts for Homes to see if you could donate some of the things you are taking out of your flip. Just a thought.
Be handy will pay off for you in the long run. Whether it’s beating the clock to get an inspection or saving a few pennies by doing it yourself. It will pay off in your house flip.
3. Know Your Area
House flipping is all about finding the worst house in the best neighborhood and bringing it up to compete with the high end of the market. To do that you need to know something about the area that you are working in. Of course, with me, I like to choose properties that are close to where I live. It’s convenient to be able to check on the house during the day plus I am aware of what is going on with other factors of municipal growth or plans. If you know that there is a new school going in within the next year or two, it is helpful in realizing your market.
House Flipping is All About The Numbers
4. Know your Costs
House flipping is all about the numbers. If real estate is about location, location, location then flipping is about do the math, do the math, do the math. In the flipping world there is something called the 70% rule. There are some variables on every deal, but for the most part, this is “the” starting point. As soon as you determine your ARV (after repair value) of the home, the next step is to calculate using the 70% rule. This will help you know what you need to purchase the property for in order to turn a profit.
Your real estate agent will be your valuable resource in this area for running comps in the area to know what that after repair value will be. Let’s say you found a property and your real estate agent has provided you an ARV of $200,000. The 70% rule would then give you a $140,000 valuation of the property. Now deduct your repair costs. Your contractor says it will cost $40,000 for your repairs and upgrades. Subtract that $40,000 from $140,000. $100,000 should be the maximum price you should pay for the property.
Now, there are always variables, like if you are looking to flip higher priced properties. Your “rule” may have to go to 80% – 90%. The 70% rule is just a place to start and a safety bumper that you won’t go in the hole.
5. Emotional Buying
Don’t “fall in love” with a property. Stick to your plan going in and if it doesn’t work with your numbers, walk away. Emotional buying will make you pay too much for the property and cause you to spend too much for the renovation. I can’t tell you how many flipper friends I know who flipped a house, got upside down in it and loved it so much they had to move into it.
Do your homework. Take your time. Count the costs, before you do the deal. Hope you have many successful flips. Happy House Flipping.