While most TV presenters make it seem incredibly easy, flipping houses isn’t quite as simple as they suggest. But I have found that it is doable if you know what you’re doing and have the necessary resources – financial and otherwise. House flippers have to have a good understanding of how much a given renovated property can sell for – as well as what it will cost them to flip it.
Flipping Homes for Beginners
There’s a great deal it goes into flipping houses, but I think anyone can be successful if they carefully crunch the numbers and do the necessary research. In my view, one of the most critical numbers you need to think about when getting into this business is the cost of financing. There’s also the question of whether you have the basic resources to start the process.
How to Flip Homes with No Money
Many people come to this wondering how to flip homes with no money. I’m amazed that some people believe the idea that they can flip houses with virtually no startup money of their own. This just isn’t the case. If I were penniless, I would not assume that the answer to my problems was flipping houses. Anyone in severe financial straits needs to solve their more immediate issues before they can move on to the house flipping tips I lay out below.
On the other hand, it is possible to do it with far less money than might be expected if the financing and renovation is handled correctly. But make no mistake, it’s not possible to be absolutely flat broke and get into this business. The following flipping homes for beginners guide will help newcomers to house flipping better understand this and other important points about the process.
1. Choose the Right Neighborhood
Before I even think about purchasing and flipping a house, I take a careful look at the housing market in the neighborhood I’m considering. While I might be able to fix up the house and make it look appealing to a potential buyer, I can’t really do anything about the neighborhood where that house is located. Some of the things I consider when evaluating a house and its neighborhood include:
The Price of Homes in the Area – In order to identify genuine deals that can potentially be flipped for good profit, it’s essential to know the average home price in the area. It’s equally important to be aware of the particular types of homes buyers prefer. For instance, there may be plenty of single-story, 2 bedroom homes in the neighborhood. But 3 bedroom, two-story Victorians with plenty of room might command a better price.
For real estate agents, this sort of research just requires hopping on the computer and MLS (multiple listing service) for home types that have recently sold. The agent can have a report with the requisite data in no time. But for non-real estate agents, getting this data is a bit more complicated. I have found that a couple of good places to look for recent sales are Zillow and Redfin.
Look Closely at Market Trends Affecting Home Prices – While it’s fine, and very important, to have a solid understanding of local real estate prices, I think it’s equally important to go a bit further to try to get a handle on just where prices will go in the coming year or years. For this, I look at the national press, blogs and local newspapers.
For instance, if I learn a new hospital is being constructed nearby and that it will employ lots of people in the area, I see this as an opportunity. This is because there’s a good chance real estate prices in the neighborhood are going to skyrocket in the immediate future. This means that a home that I invest in today could flip for a significant profit in the near-term.
Good Neighborhoods Versus Low Income Neighborhoods – It’s easy to overlook the fact that – while initial research may indicate the local market has only a few months inventory of homes – there could also be a deceptive “shadow inventory.” These are foreclosed or real estate owned homes that can negatively impact local home values.
Something I always consider carefully is the issue of crime. Purchasing, renovating and then showing a new home in a bad neighborhood can be a problem. In my experience, when the house is in a bad neighborhood flippers can have difficulty finding contractors who are willing to leave their equipment and tools at the jobsite. They may even be reluctant to accept the contract to begin with. More than this, why make my selling job harder by trying to convince homeowners to purchase a home where they might not feel comfortable or safe.
Choosing a better neighborhood makes the process of buying, fixing up and then selling the home much easier. There’s no denying finding good deals in these better neighborhoods can be more difficult, but avoiding all the problems and stress of the bad neighborhood makes this a no-brainer. At the very least, it’s a good idea to look for homes at the outskirts of better neighborhoods. That way, even if the neighborhood houses aren’t great, perhaps the school district, nearby shopping and medical facilities are excellent.
2. Choose the Right House for Flipping
After identifying the right neighborhood and noting a few houses, the next step is selecting a specific house within that neighborhood. While there is no one best way to find houses to fix and flip, investors generally agree that referrals, driving through neighborhoods, using the MLS and advertising are all great ways to find houses to flip. Some approaches to consider include:
Getting Referrals – This means networking with brokers. I try to make sure when I am working with brokers, that they are satisfied with the result. I close on time and pay cash. This makes them willing to do me a favor. In the case of a referral, this means if they don’t have the time or ability to quickly flip a home for profit, they might hand a listing over to me – perhaps at the cost of a minimal finder’s fee.
Use the MLS – For those of us who have access to the MLS, it can be one of the best places to look for homes that can be fixed and quickly flipped. The key to achieving success with this approach is to look for properties that are in poor condition, incorrectly listed or that have a great deal of square footage for the number of bedrooms. For instance, a home that has 2600 square feet of space but only 2 bedrooms might be easily renovated into a three-bedroom home that nets a much higher price.
Advertise – Advertising is another approach I sometimes use in finding houses to flip. Since I’m trying to find “undervalued” homes, this isn’t the easiest method for finding a house that will work for me. Still, plenty of professional house flippers do use advertising to locate homes. Some of them use so-called “bandit signs” to advertise their service to people who are desperate for cash. And of course there are direct mail yellow letters. These are usually printed to look handwritten and are sent to homeowners – or left on their door.
3. Carefully Evaluate Both the Property and the Deal
Once I locate a listing that looks like it might have some potential for fixing up and flipping, my next step is to go to a showing of the house so I can look it over in person and in detail. It’s not a bad idea to take along a contractor as well.
Calculate the ARV (After Repair Value) – I think this is best done by considering the price of recently sold homes that are similar to the condition and size of the home I’m thinking about purchasing, renovating and flipping.
Bring in a Professional Home Inspector – Even in cases where I have a contractor with me when I first visit the house, I will usually pay for a professional home inspection as well. This can look at the home in more detail – hopefully detecting any expensive repairs that would have to be done before the home can be sold. Potential problems include large foundation cracks, damaged/hazardous chimneys, worn-out old electrical wiring, and costly to remove buried oil tanks.
4. Financing a Flipper Home
I think one of the biggest challenges facing beginners in this business relates to understanding how they can pay for the homes they want to buy and flip. It’s understandable that this can seem difficult, given that most lenders don’t want to lend money on a home that’s in poor condition or to investors who don’t have very deep pockets. Fortunately, there are other options for flippers when it comes to financing.
Hard Money Lender – I think these are generally best for borrowers who have poor credit or beginners who have flipped few or no houses. Hard money lenders are essentially small groups of individual investors who are willing to lend house flippers the money they need. The principal advantage they offer is that they focus less on the financial wherewithal of the borrower than on the home’s ARV.
Private Money Lender – Again, I think this financing approach works well for those with poor credit or beginner flippers. The principal difference between a private money lender and a hard money lender is that there are usually fewer investors in the group – sometimes there’s only one.
Traditional Bank Loans – Obviously, another method that can be used is a conventional mortgage. This approach is best for the experienced investor. But as I mentioned above, most banks don’t want to lend money so borrowers can buy a home that’s in poor condition. This makes this approach very difficult for beginning flippers without a great deal of money of their own.
Crowdfunding Financing – This is a fairly new option for house flippers looking for financing. I like this approach because it gives flippers access to large numbers of potential investors and they can get the money fairly quickly. Whereas financing with a private lender might take weeks to close, a crowdfunding lender can provide me with the cash I need in a matter of days. This approach is best for fairly experienced investors who want the money fast.
Overview of Fix and Flip Loans
In addition to understanding the options available to flippers for financing their projects, it’s important also to appreciate just how these loans actually work.
• Getting Approved: This involves filling out the loan application, providing an overview of your plans to the financer and then sending an appraiser – who will assess the home’s condition and potential ARV.
• The Amount Borrowed: In my experience, lenders will generally offer a maximum of 80% of the ARV of the home you’re considering. Usually, it’s going to be more like 65%. This means a home with an ARV of around $300,000 might get a loan of only $210,000. And if the lender is only considering the current value of the home, things can be even worse – making these loans only useful for homes that don’t need much work.
• Loan Terms: Flip lenders generally offer investors loans with terms of 1-12 months, since flippers will usually purchase, renovate and resell a home in less than a year.
• Fees and Interest Rates: Depending on the investor’s credit score, income, assets and the ARV of the house in question, most flippers find that lenders will offer rates ranging from 8-16%. It’s usually necessary to pay approximately 1-5% of the home’s value at closing.
5. Create a Network of Contacts
I have ended up working with any number of lawyers, contractors, appraisers, inspectors and title companies, and in the process I have tried to forge strong relationships with as many of these people as possible. This kind of networking can be very useful. If nothing else, these people can help guide you and educate you about the process.
Contractor Relationships – I know that you can expect to work with many different contractors over the years, but I have found during my time flipping houses that it’s a good idea to develop a solid relationship with an excellent general contractor who is both reliable and affordable. This can alleviate many potential headaches. A contractor needs to be someone who can be trusted to do a good job while staying within the budget.
Of course, it will be necessary to have multiple contractors for different types of jobs. In addition to a general contractor, I often need skilled electricians, plumbers and carpenters when renovating my houses. Finding an affordable, reliable contractor can sometimes feel like trying to get a clear photo of Bigfoot. Still, they are out there if you keep looking. Avoid lowball contractors, since you really do get what you pay for.
Vetting a Contractor – I have found that failing to properly vet a potential contractor can lead to serious and pricey problems later. To start with, I always check to make sure a contractor has an up-to-date license and doesn’t have tons of negative reviews at the Better Business Bureau or on Yelp. Even then, I’ll usually hire them to handle a smaller job to see how they do. If I like their work and their attitude, I then try them on bigger jobs.
A Quick Note about Being Your Own Contractor
My opinion is that most flippers who try to be their own contractors are just asking for trouble. Yes, some of us do have the necessary skills to do some basic work renovating a home. For those who have these kinds of abilities, it’s certainly an opportunity to save money – although it also has to be recognized that time is money. The time that I might spend painting the exterior of a home might be better spent researching the next house I’m going to buy – while paying a contractor to do the painting on the current one.
Home Inspectors – After finding a really good contractor, the next step is getting an experienced home inspector. This needs to be done well before closing, since you don’t want to find out that the foundation of a house is crumbling after already investing money in the property.
When choosing a home inspector, I always look for one who’s a member of one or more of the home inspector professional associations, such as NAHI or ASHI. While this isn’t an absolute guarantee of knowledge, skill or reliability, it at least indicates they’re serious about their career. Then of course, it’s time to check the Better Business Bureau and reviews on yelp again. I sometimes also ask home inspectors I’m considering to provide a sample home inspection report so I can see just how comprehensive they are.
Real Estate Agents – There are a lot of real estate agents out there, and finding a good one is not easy. Certainly, finding an agent who understands the needs of investors hoping to flip houses can be particularly difficult. The best thing to do is to get a referral. Of course, while access to their skills is useful, what most investors really want from the real estate agent they choose is access to the MLS.
One thing I think most flippers fail to understand is that they need to provide details when talking to a real estate agent. Asking for “a great deal” just isn’t sufficient. When I’m talking to an agent, I give them specifics by saying things like, “I need a three-bedroom, 3 bath house in neighborhood X that’s less than $100 per square foot.” Specific requests get useful responses – with any luck.
Attorneys and Title Companies – While flippers may not need a lawyer or a title and escrow company immediately, it can’t hurt to put out some prospective feelers before the need arises. When it comes to choosing these highly trained professionals, it’s essential to get referrals from other experienced professionals. One potential way to choose these individuals is to use the same ones used by your real estate agent.
6. Renovating the Home
It would be nice to think that once the deal has been closed and a contractor is hired, all that’s left to do is relax and allow the contractors to get to work. However, it should come as no surprise that it’s not quite that simple. I have – through bitter experience – learned that it’s important to keep a close eye on the contractor or contractors to ensure that the work is completed on time, on budget and to my full satisfaction. I do this even with contractors that I have used for years. Below are a few other contractor tips:
Stay in Communication – Even though I try to avoid being a distraction on the job site, I still think it’s important to maintain contact with the contractor. This should be at least once a week to ensure that work is being done on schedule and to the established specifications. For those who want to do some of the basic cosmetic work themselves, it’s important to coordinate the work with the contractor’s schedule to avoid interfering with his work.
Contractor Payment – For the most part, it’s much better to pay contractors based on set milestones instead of paying them on a weekly basis. I usually pay my contractor a small deposit, following this with other payments when the floors are completed or when the kitchen is done. Investors who make the mistake of paying money to an unscrupulous contractor for work that has not been completed can often find themselves in a very difficult position and needing a lawyer.
Tips for Maximizing ROI
While great lighting and beautiful hardwood floors are extremely attractive for potential buyers, it’s a good idea not to think too much about the present aesthetics of the home. For the purposes of an investor thinking about flipping a house, it’s best to look for things that can be improved. Below are some great ideas for doing just that.
New Front Door: Many people don’t believe me when I say it, but few things provide a better return on investment when renovating a home than installing a high quality front door. Sturdy steel entry doors can significantly enhance the resale value of homes, and I strongly advise beginning flippers to consider it.
Replacement Windows: Most people recognize that replacing old worn-out windows with high-quality, energy-efficient models is an excellent investment in any home – including one you want to resell. Certainly, potential customers want to know that their new home isn’t going to have outrageous energy bills, and replacing windows is one way of providing reassurance.
In my view, window replacement is one of the most efficient things you can do with a rehabbing budget. It offers a threefold return, increasing curb appeal, the value of the home and energy efficiency. It’s difficult to think of another potential renovation a flipper could make that could yield as much as this particular change.
Updated Kitchens: For many families, the kitchen is the central point of the home. This may be one reason why updating a kitchen and a home before flipping it can result in such significant ROI rates. The benefit of this kind of kitchen update is that it increases your ability to draw in potential buyers. Few things can attract buyers more readily than a beautiful, well laid out kitchen. I have to say that the reverse is also true, since an ugly, outdated kitchen can send potential buyers scurrying off.
Refinished Floors: I think most potential buyers are looking for hardwood floors these days, so ripping out ugly old linoleum and carpet and refinishing the wooden floor underneath can really impact buyer perception of the home. Of course, it’s best to avoid replacing the floorboards unless absolutely necessary. In the same way, tile replacement in the bathroom and kitchen is a relatively inexpensive and simple repair that can significantly improve a home’s appearance.
Internal Changes: These kinds of changes are more difficult, more expensive and may need more permits, but adding an additional bedroom for opening up dining rooms or enclosed kitchens can yield very positive results. This kind of open plan home not only seems larger to potential buyers, it also brightens up rooms with additional light.
Finished Basements: Usually, cities won’t allow basements to be described as bedrooms – but buyers are still impressed by the extra space they get with a finished basement they can then use for whatever purpose they choose, whether it’s a guest room, home office or den.
7. How Much Money Can You Make Flipping Homes?
While it might seem like there should be some major difference between selling a home that was just renovated for flipping and selling any other home, this isn’t the case. The only real difference is that you want to do it quickly. I like to avoid the carrying costs involved in holding a home longer than a year or so, since this means reduced profits.
So how much money can you make flipping homes? Honestly, it really depends on the home, the neighborhood and how well you have done your research into the local market. It’s a mistake to want to make massive profits, since this will often lead a flipper to hang onto a property for longer than they should.
It’s a bad idea to wait for a lot of offers. As long as I make a decent profit, I’ll take the first or second offer I get. Once an investor is in the black, they can take their profits and move on to the next project. Here are some options for speeding up the process.
Use a Real Estate Agent – One option that many flippers do consider is to use a real estate agent to help them flip their home. There is a lot of debate about this, particularly among flippers who themselves are not real estate agents. On the one hand, real estate agents have to be paid – but on the other hand using a real estate agent means reaching a much larger pool of potential buyers via the MLS.
I’m of two minds about this myself, and I admit that there are both pros and cons to doing this. Flippers can certainly get more buyers seeing the house they have for sale, which ultimately means more offers. The obvious con involved in hiring real estate agents to do this is the additional expense involved. The standard fee for real estate agents is 6% plus closing costs.
Obviously, a real estate agent is going to assure any flipper that they can just as easily make as much money hiring them to do this part of the job – but logically we all know that’s not the case. If the house sells for enough to pay for this extra expense, that extra could have gone in the flipper’s pocket.
Sell the House Yourself – One way to avoid paying the fees a real estate agent would demand is to become a licensed real estate agent. This means taking a few classes and getting associated with a real estate brokerage, but the knowledge gained – as well as the networking connections – can only be a benefit in the future.
A Few Closing Tips for Hope Flippers
For those wanting to become a fix and flip champion, there are certain skill sets that are absolutely essential:
• Accurately Assessing House Renovation Costs: Like any business person, I’m not in business to lose money. The entire point of flipping a home is to buy it, renovate it and then quickly sell it for a decent profit. Doing this means mastering the ability to accurately evaluate costs involved in renovating a given home. If I pay more for the home and its repair than the AVR, I’m going to lose money and go out of business. Determine which repairs will actually lead to profitability.
• Accurately Gauging Market Value: It’s absolutely essential to be able to accurately gauge the market value of the home in question. If I don’t know what the value of this home is currently and what it might be in the immediate future or after renovation, I’m basically flying blind and hoping for the best. That’s no way to run a business.
Some of the Best Markets for Flipping Homes
Looking beyond neighborhoods, it’s important to recognize that some cities are simply better for flipping homes than others. Economic conditions in these cities or other circumstances have made them places where flippers can hope to see significant profits above the price they originally paid. As noted by Fortune magazine in 2016, some of the most significant of these locales include:
East Stroudsburg, Pennsylvania
New Haven, Connecticut
New Orleans, Louisiana
Buffalo, New York
All of these cities provided flippers with gross profits that were 80% or more above the price originally paid for the property. Of course, these are averages, and it’s still quite possible – even in the best markets for flipping homes – to lose money flipping a house if you do it badly. But at least in these locations, you’re giving yourself every possible advantage.
Wrapping It Up
These days, it’s very difficult to make the kind of rapid, easy money that so many television presenters suggest can be earned through flipping houses. All the same, it is possible to make a very good living in this business. The key is taking the time to learn about the local market, to build skills and knowledge and to establish long-lasting relationships with various professionals – contractors, real estate agents and so on.
I tell anyone who is first starting out in the business of flipping homes to keep their focus – at least initially – on good neighborhoods and promising deals where they can hope to get a minimum of 30% profit from a renovated home. After gaining experience, they can be a bit more adventurous. But even then, sticking to the fundamentals is what leads to profitability and success. Flipping homes should not be like gambling. It should be a systematic, well thought out plan that yields a fairly predictable result.