House Flipping 101:
How to Get Started Flipping Houses for a Living
In this article we will cover the various aspects of flipping houses successfully without making the mistakes that most new real estate investors make. Let's start off with the basics.
House Flipping Definition
You probably already know this but, in the interest of covering all of the basics, the definition of House Flipping is simply the process of buying a "fixer-upper" house for a low enough price to make a profit after fixing it up and reselling it for a higher price.
House Flipping Classes, Seminars, Webinars and Mentors
A question commonly asked by new investors is, "How can I learn more about House Flipping?"
There are plenty of books, websites, classes, seminars and webinars about the subject.
In fact, there is so much information about flipping houses that it can be very overwhelming to someone who is just starting out.
Therefore, I have tried to simplify the process as much as possible in this article. And once you have a good idea of the basics, there are a few resources listed at the bottom of this post to help you learn much more and even how to get one-on-one help if you so desire.
Best Tips for Flipping Real Estate Successfully
Have a Realtor help you find the most accurate value of a house before considering it for a flip.
Prepare financially for the investment (purchase price, repair costs, holding costs, closing costs, taxes, insurance).
Find a deal with enough equity to make it profitable.
Approach the seller with sincerity and compassion and be as helpful as you can be as you make your offer.
Make a reasonable offer to the seller that will solve their problem.
Make the process seamless and easy for the seller.
Use professionals, (Title Company or RE Attorney) for the closing and document processing to put the seller at ease.
Use professional contractors with references and good reputations. Use detailed and specific contracts that spell out the scope of work to be done, as well as the budgets and remedies for non-performance and use realistic, enforceable deadlines.
Let your Real Estate Agent sell the house so you can move on to your next project. Don't try to sell as a For-Sale-By-Owner because, when it comes to investing, Time is Money!!!
Preparation Checklist for House Flipping Success:
Financing and cash, enough to cover the entire cost of the project from beginning to end.
Consistent and reliable repair people and contractors, along with back-up contractors and people in place who can step in if anyone can't or doesn't perform.
Good record keeping and bookkeeping practices.
Good communication skills, follow through and control of the project to make sure everyone knows their assignments and that they are meeting their deadlines.
Costs to Consider When Analyzing a Potential Flip:
It is not just about the price you pay and what you can sell for. There are other costs involved that you need to consider when running your numbers to determine whether a flip has the potential for profit.
Interest payments to a lender if financed.
Inspections costs and appraisal fees.
Property taxes from the date of taking ownership to the date of re-sale which will be pro-rated at closing.
Hazard insurance premiums to pay.
Utility bills to pay, maintenance and up-keeping expenses such as cutting the grass or snow removal.
Repair costs and final clean up costs.
Closing costs at the purchase and closing costs at the sale paid to a Title Company and/or an Attorney.
There may be Realtor fees at the closing of the sale. Agent and Realtor fees are always paid out of the proceeds of the sale on the seller's side.
And don't forget some profit for the flipper!
Best Ways to Find a Good House to Flip
The best flip deals are the ones where you are dealing with the seller directly. I have found that reaching out to them through a well written letter that is personal, rather than a form letter, will be more likely to be read all the way through. I have written to owners whose properties were local when I noticed the house was vacant.
I have also called FSBO ads I've found online who sound motivated or from signage on a house that looks distressed. I have even gone to the door in person, unannounced during daylight hours on houses where the owner has not offered the house for sale publicly, but is in some obvious distress. People in distress are often grateful to hear from you if you treat them right. Be honest and look for win-win scenarios.
You can build your own team of bird-dogs to be on the look out for these vacant houses simply by telling everyone you know that if they find one for you, you'll give them $100 if you end up buying it.
And then, of course, there is advertising with I Buy Houses Ads on local bandit signs, on decals on your vehicles, on social media and Google, on Craiglist, on local classified ads. But do keep in mind that there are a lot of other investors using I Buy Houses ads. To stand out, experiment with various phrases to grab the attention of motivated sellers like:
And don't forget how important it is to have your own website optimized for Google ranking.
How to Get an Accurate Property Value on a Flip House:
Determining which fixer uppers have the best potential for a profit and how much to offer starts with knowing both the Current Value (As-Is) of the property and its After Repair Value (ARV).
As an investor, getting property value estimates from instant home value sites like Zillow can ruin you. Those sites are great for looking at property photos, finding public data and getting a vague idea of area values. But remember that it is also common for values from those sites to be tens or even hundreds of thousands of dollars off from the actual value.
To get an accurate ARV, it is critical to use a local Realtor, who lives in the area and knows it well, to run a CMA Report (Comparative Market Analysis) for you by using comps (MLS Comparable Sales) on recently remodeled homes nearby. This will give you an ARV, which is the amount you will be able to sell the house for after fixing it up.
It is also a good idea to have the agent run a 2nd CMA on homes comparable to the current condition of the investment property in order to get an As-Is Value. This will help confirm your Maximum Offer number and give you negotiating power with the seller.
Don't be greedy with your offer. You have to find a sweet spot, where the offer is high enough that the seller will say Yes but you are also making a good profit.
And once the renovation is done, you will also want to get another CMA of recently sold remodeled homes nearby to confirm your selling price because the market will have changed by then.
Learn all about how to get a Real Estate Comps Report for an Accurate House Value.
Narrowing Down Your List of Fixer Uppers
Once you've made a list of fixer upper houses to flip, you'll need a quick elimination process to narrow down your finds to the gems with the most potential for profit.
We've talked about the best ways to find houses to flip. But just because you found a fixer upper at a reduced price, doesn't mean you will make a profit. Analyzing potential flips accurately can mean all of the difference between an absolute success or a complete failure.
Narrow down your list of fixer uppers to those with the most potential for profit by comparing the asking price and/or equity to the actual value of the house. You want to do this because the bigger the difference between the value of the house and the amount that the seller owes on the house, the more bargaining room they have.
For example, let's say that the seller is highly motivated because they are nearing foreclosure and asking $195,000 but owes only $125,000. Yet, the resale value of the house (after fixing it up) is $250,000. In this case, you may be able to get them to accept an offer for what they owe. You can even sweeten the deal by offering to pay for moving costs and a little extra cash to get them back on their feet.
Another way to determine how much to offer on a flip house is to use the 70 percent rule. The 70 rule in house flipping means that you should never pay more than 70% of the After Repair Value minus the cost of the renovation.
So, if the ARV was $250,000, you would multiply that by 70% (.70) which equals $175,000. Then you would subtract the projected cost of the renovation to get an initial maximum offer number.
A typical cost for a cosmetic renovation (no major or structural repairs) is about $20/sq ft. But that's just a vague figure you'll want to use while narrowing down your flip finds.
Once you've chosen your favorite property, you'll want to get an inspection, a renovation recommendations consultation with a local realtor for a fast sale at top dollar and detailed bids from contractors to confirm the actual renovation costs.
Next factor in ALL of the costs involved in a typical flip, including renovation costs, financing costs, holding and maintenance costs as well as selling costs.
Finally, subtract all costs and your desired profit from the ARV to determine your Maximum Offer.
How to Run the Numbers on a Flip to Determine Profitability
Once you have a good idea of all of the costs, you can subtract those and the profit you'd like to make from the After Repair Value (ARV) of the home, to confirm your Maximum Offer number.
Here's an Example of a Maximum Offer Formula:
The typical desired profit in a flip is 20% of the ARV, which, in this case, would be about $50,000. But in reality, that kind of profit is rare, depending on all of the actual costs involved. For most investors, the profit ends up being more like 10 to 15%.
Also, keep in mind that if you have construction experience, spare time or your own funds, you can save on costs and make a little more profit. But do leave most of the renovation work to a team of great contractors because the faster you get the house flipped, the faster to you will get on to the next one to make even more profit.
Best Ways to Fund a Flip House
Traditional bank financing for the lowest interest.
Home equity line of credit or cash-out refinance of your home or a partner's home.
Use your 401K or IRA tax free.
Private funding from friends, family or partners.
Live in the property while you renovate it.
Hard money lenders.
Good Project Management is Key:
If no one is managing the contractors and the progress of the project, you will not know if you are staying in budget or on track with your deadlines. You will also not know if the quality of the workmanship is up to the standards that you expect it to be. Unmanaged, it can easily get out of control fast!
The best time to catch a mistake is as soon as it is made so it can be corrected and used as a tool to make sure the contractor is clear on your expectations. This will also ensure you are not paying for poor quality or work that has not been done. Weekly reviews and inspections of the work and the budget should be the minimum!
How to Prepare a Budget for Renovation:
There are some differences in repair costs depending on where the property is located. Materials and labor are more expensive is some markets. Get to know what the local costs are for materials.
There are several ways to estimate the cost of renovation:
Start by using the $/SqFt Method. The average cost of a simple cosmetic renovation is about $20-25/sq ft, depending on the condition of the property and the area.
Next check out Home Advisor's True Cost Guide to find average costs in your area which they even break down intro materials, labor, demo or for specific things like just a new tub surround.
Most importantly, once you've done your initial estimations, confirm the renovation costs with actual bids from contractors.
The more you know what things cost, the better prepared you will be. For instance, on average, materials on a cosmetic bathroom remodel might cost about $2,500 +/- in materials. Repairs and upgrades to consider include vanity, tile floor covering, counter top, sink, faucets and fixtures, bathtub and tile shower surround, lighting, exhaust fan, mirror and towel bars and paper holders, etc.
If a contractor quotes you $5,500 to do the entire job including materials, then you know the contractor is charging you about $3,000 in labor. If the job requires two workers for 5 days to get it done, you are paying approximately $300 per person per day in labor. If that sounds reasonable to you compared to the other bids you get, then you can feel comfortable to consider them.
When you break it down like this, you get a sense of costs for the materials apart from the labor. You need to know this because if you ask a contractor to break it down the way I've just described, their head will explode and you will never get your bid.
You will need to do that math yourself. It is my experience that a contractor will rarely break it down for you, either because they don't want to invest the time to do it or because they do not know how to do it. They just know in their head what they want to charge you for the job. Get to know your material costs!!!
Also consider the kinds of renovations that add the most home value and the highest return on your investment.
How to Work with Contractors Like a Well-Oiled Machine:
The Contractor Agreement is the most important part of working with any contractor. Whether the project is large or small, never skip the step of putting together and getting signed, a very detailed contractor agreement. If every small detail is in writing about the scope of work and what they are supposed to do within the budget quoted to you by them, then the contract is enforceable.
For instance, don't just say, "Paint the interior". Say paint every interior wall this color and all the ceilings in every room that color and all interior doors, closet doors, door trim and window trim, baseboards and crown molding throughout the house in every room this color. That way, if they don't do it, you don't have to argue with them, just show them the contract they signed and what they agreed to do and how they agreed to do it.
Also do not EVER pay a contractor in advance for their work. Pay them a token advance to get them started. Then pay them only for the work they have completed each week until the project is finished. This may require inspections each week, but using technology, some of that can be done remotely.
The contractor agreement stipulates the quality of the workmanship, clean-up required and how they will be paid on a weekly basis only for work completed. If they fail to complete the work or do not do the quality of work stipulated, you are not legally obligated to pay them.
Make contractors agree that if they violate the contractor agreement in any way, they waive their right to put any liens on the property. With such a well written contract in place, if they do not perform and you have to replace them, you just have to make sure you have paid them for the work they did complete that was up to the quality standards stipulated and you can part ways with no further legal obligation on either of your parts.
They have been paid for what they did and you have not over-paid or lost money on bad quality work and are now free to replace them, keeping your original budget for the work in tact.
If a contractor will not sigh such an agreement, don't hire them. Or do so at your own risk, which we do not recommend.
Do not allow a contractor to make a "change order" (any new work that needs to be done, not in the original contract) once a contractor agreement has been put in place. Get new bids from multiple contractors, (including the one on the job), for any new work that has to be done.
Also, very important: If any materials have to be delivered to the property by a supplier directly, make sure the supplier has been paid before you pay the contractor for the materials. If they have not, pay them directly and deduct it from what you would pay the contractor. This is because the supplier has a legal right to put a lien on the property if they have not been paid for those materials when the materials were delivered to the property directly.
Get receipts for EVERYTHING!
What NOT to DO for a Successful Flip
Never Make Verbal agreements! Words are not enforceable if they are not written down and agreed to with a signature.
Do not buy materials for the contractors. Make them buy the materials.
Do NOT try to do the work yourself!
Do not hire family and friends unless this is their profession and only if they are willing to be treated just like any other contractor with the same requirements and make them sign the same contractor agreements.
You want the work done as fast and efficiently as possible. Nights and weekends working around some other day job does not accomplish your goals for such a project.
The 3 Biggest Reasons Real Estate Investors Fail
There are many ways to fail at real estate investing and so many things to consider, it can make your head spin. That's why plenty of "would be" investors never actually get started and a fair number of investors don't succeed enough to make a great living.
After researching why some investors don't take action or find success, here are the top reasons they gave:
#1 - Money
The most common reason investors gave for not pulling the trigger on their first real estate deal is the fear of losing money or not having enough to get started and also how to get financing, how to get started with a low credit score and waiting until they are out of debt.
Luckily, an experienced Real Estate Investing Pro can take you under their wing as your personal mentor and teach you a lot about creative financing strategies, like:
How to make everyday people into your own private lenders.
How to use the equity in your house or a partner's house to invest over and over again.
How to get funding from hard money lenders even if you don't have a great credit score.
How to get started in wholesaling houses or birddogging for other investors with almost no money.
#2 - Lack of Experience, Knowledge, Education and Mentoring
Money may be the number one reason that investors never get started, but not knowing how to get started or how to have success is definitely the deepest rabbit hole.
Many investors say they need education and guidance on things like:
The best real estate investing strategies.
Where to start.
A step-by-step plan.
How to get a mentor or partner to learn from.
Finding good deals.
Analysis paralysis.
Fear of making the wrong decisions.
Fear of going it alone.
Contracts and what terms to use.
Legal protection.
Getting over the intimidation of renovating a bad house.
How to manage contractors smoothly.
How to build a team of real estate professionals like realtors, lenders, birddogs, contractors, title companies, attorney's, insurance agents and other helpers.
How to do thorough due diligence on a property (research on liens, deeds, zoning, code violations, etc.).
The challenges of land lording.
Procrastination and lack of self-discipline.
Time Management.
Overcoming criticism from family, friends and nay-sayers.
#3 - The Market Status
Some investors say that their market is too competitive, making it a challenge to find a good deal and that they fear investing long-distance. Others say that their market is too slow, which can make it more difficult to resell or that they fear a market crash.
But the truth is that a seasoned investor can show you the secrets to having success in any market.
Our #1 Tip for Real Estate Investing Success!
The most sure fire way to succeed as a real estate investor is to learn from another successful investor's mistakes. Why make all of those mistakes on your own when you could sail on through with a pro as your partner?
You can find experienced investors to partner with by being very active at networking. Meet real estate investing pro's in your area by joining real estate investing discussion groups online and going to local investor club meetings and auctions. Make friends with them, take them out to lunch, pick their brains and offer to help them for free for a while.
Once they start to see your value and trustworthiness, ask them to partner with you on a deal.
Or, you could get on the fast track and do things the easy way by hiring a Real Estate Investing Pro as Your Mentor today where you will get access to all of the forms, formulas, e-books, training and more that you need to get off to a successful start.
Happy Investing!
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About the Author
Jan Kerr is one of the Co-Founders of Real Estate Comps Today and has been a Real Estate Investor, Speaker, Public Personality and Mentor for thousands of real estate investors all of the country for over 20 years.
After years of complaints on the inaccuracy of instant home value estimator tools online from her investing students, Jan and her partner, Lori Greene, knew it was time to create an online service to solve this problem.
Real Estate Comps Today was created as a place where consumers and investors, anywhere in the U.S., can order a Home Value Comps Report from a Local Realtor and do it all online without having to contact one. It is the only service of its kind.
More information about Jan Kerr, Lori Greene and Real Estate Comps Today can be found at: