So you’re thinking about getting into house flipping.
That’s understandable, especially since the nationwide median net margin on flips is around $32,371.
How many of these paychecks do you need per year to replace your current income?
That’s one of the benefits of house flipping over most other real estate investment strategies. Instead of providing gradual income like rent, flipping houses quickly generates large chunks of capital.
But don’t go and grab a sledgehammer and put in an offer on a dilapidated house just yet. There are several skills needed to flip houses – much more than being able to pick out color combinations or lay flooring.
While these are excellent skills to have, you also need to consider these questions:
- Where will you find houses to flip?
- How will you fund the purchase and rehab expenses?
- How much work do you plan to do yourself?
- Will you hire an agent to sell your flip or sell it yourself?
We’ve covered all of these questions as well as house flipping terms in this article so that you can learn what sets successful flippers apart from beginners.
Let’s get into it!
A House Flipping Definition
First off, what is house flipping exactly, and what does it entail? In its most traditional sense, flipping involves purchasing a house that needs repairs or updates, making renovations, and then selling it for a profit.
Each of these three stages of the flipping process must be approached thoughtfully in order to maximize profits. A mistake on one of them could eat into your return, or worse, jeopardize your profit completely.
Do You Need A License To Flip Houses?
Absolutely not. In fact, most real estate investors don’t have a real estate license.
Think about the three major steps of flipping houses.
While you will not have direct access to the MLS (Multiple Listing Service) without a real estate license, you can easily team up with an agent in your market to keep you up to date on the newest listings. Also, in a seller’s market, your best bet for finding profitable house flipping deals will be to look outside of the MLS (more on this later).
You definitely don’t need a real estate license to renovate a house. The only license relevant at this step is a general contractor’s license. Many counties require a contractor to pull permits before making significant modifications to a house. To determine what is needed, contact your local building and permit office. Even if they require a contractor’s license to obtain the necessary permits, it is almost always best to hire a contractor and allow them to handle all of the paperwork.
Once you’ve renovated a house and are ready to sell it, you are most likely to get top-dollar by listing it on the MLS. While doing this requires a real estate license, it is not necessary for you to be the one that lists it. Even though you can save thousands of dollars in agent commissions by handling this yourself, you must evaluate what you want to spend your time on. Most house flippers focus on the buying and renovating side and then pair up with a skilled real estate agent to sell their houses once they are remodeled.
What You Need to Do to Buy a Foreclosed House
There is a common saying in real estate investing, “You make your money when you buy.”
And there is a lot of truth to this saying. It is tough to come back from paying too much for a flip house. Conversely, buying a home with plenty of margin for renovation and profit will make the entire process go much smoother.
But how do you find houses with enough margin to flip?
One of the best ways is foreclosures.
A foreclosure occurs when a homeowner falls behind on their mortgage payments. Once the payments stack up to a certain amount, their lender decides to foreclose and sell the house to recover their money.
Because these sales often involve someone that is motivated to sell the house, whether it be the lender or the homeowner, they can often be purchased at a significant discount.
But to be successful, you must know where to buy a foreclosed home. Here are the three main methods.
Buying Houses in Pre-Foreclosure
The period between when the lender files a Notice of Default on a homeowner behind on payments and when the house is sold at a foreclosure auction is known as pre-foreclosure. This is often the best time for real estate investors to the house because discussions are typically solely between the buyer and seller. The only communication needed with the lender is to request a payoff statement. This will tell you how much it will take to satisfy the loan entirely, and in these cases, it often includes the principal balance, accrued interest from missed payments, and attorney fees from beginning the foreclosure process. Another perk to buying a house in pre-foreclosure is that this is the only time you can buy it without competing with other investors. When it goes to auction, anyone that wants it can come and bid on it.
Buying A House At A Foreclosure Auction
If the homeowner in foreclosure does not resolve the issue before the auction date, the house will be auctioned off to recoup the money owed to the lender. These auctions typically take place at the county courthouse. Sometimes they are held in a conference room, but they are often held on the courthouse steps. The bidding typically starts around the payoff amount. This is why it is better to buy the house before this point, because it can only be bid up from there. And that almost always happens.
There are three reasons why buying a house at a foreclosure auction is not recommended for a beginner investor.
- It is often difficult to see the house before the auction, so you will usually be buying it sight unseen.
- Prices often get bid to high prices, and rookie investors often get caught up in the hype and end up paying too much.
- The attorney handling the auction will often require you to provide the funds for the purchase very quickly – usually the next day at the latest. This requires you to have cash available or access to another source of liquid capital.
Buying Bank-Owned Houses (REO)
Sometimes a house goes to a foreclosure auction, but no one is willing to pay what the bank is asking for it. In these cases, the house goes back to the bank, and it becomes what is known as an REO (Real Estate Owned). Banks do not want these properties on their books, so they will often turn around and list them with an agent shortly after the auction. If you are interested in trying to purchase an REO for your flip project, it is best to work with an agent that has experience with these transactions since negotiating with the bank can often be tricky.
House Flipping Tips and Strategies
There are several skills you must master to become a successful house flipper. Beyond that, there is a tremendous amount of knowledge that is only gained through experience and hard work. Here are the top house flipping tips and tricks that will significantly increase your success rate.
Understanding your market is vital when running a house-flipping business. Are home prices increasing, or are they projected to fall soon? Is it more of a buyer’s or seller’s market? Only data can give you these answers. Here is the most critical information to gather when researching your market:
- Number of houses on the market
- Average number of homes sold per month
- Average Days On Market (DOM)
- Median Sales Price
Marketing For Deals
If your market is like most markets across the nation right now, it is a hot seller’s market, and finding a good deal is extremely difficult. But that doesn’t mean you should give up on your goal of flipping houses. It just means that you need to develop creative ways to locate profitable deals. This usually means finding houses to buy outside the traditional route of going through a buyer’s agent. Here are some ways to find off-market houses to buy:
- Connect with wholesalers in your market
- Direct mail – sending postcards to homeowners
- Cold calling
- Driving for dollars – Driving neighborhoods in search of distressed houses
- SEO (Search Engine Optimization) – Building a website that ranks on Google for search terms like “We Buy Houses [Your City]”
Negotiating With Sellers
Many people hear the word “negotiation,” and their heart begins racing. But you’ll be relieved to know that most real estate deals do not involve quite the level of bare-knuckle bargaining that you’re thinking.
Here is the number one secret to negotiating a profitable real estate deal: Help the seller with their problem.
Any successful real estate investor will tell you that in order to strike up a profitable deal, there must be some underlying motivation causing them to need to sell. This could be the condition of the house itself, financial stress, or any other number of life issues.
If you can solve these issues for someone by purchasing their house, it is much more likely that you will be able to get it for a reasonable price, and they will be happy that you were able to help them!
Determining the right price to pay for a flip house has two components: Calculating what it will be worth after renovations and properly estimating the rehab expenses.
After Repair Value (ARV)
The After Repair Value, or ARV, is the estimated price the home will sell for after it is fixed up. It is calculated by figuring out the average price per square foot of nearby, similar homes that have recently sold and multiplying that value by the square footage of the house in consideration.
Estimating Rehab Expenses
The ARV and the repair expenses will be the two most significant factors in determining the appropriate purchase price to make your flipping project successful. To correctly estimate the costs to renovate a flip house, you must take special care when viewing it. This takes a very attentive eye. Even though issues aren’t glaringly obvious on your walkthrough, they will begin to show themselves once you start the project. Having a realistic rehab budget upfront will allow you to set the right purchase price and make the entire process go much more smoothly.
Two professionals who can help you estimate repair costs when starting out are a contractor and a home inspector. A contractor will be able to pick out things that need to be fixed and give you an estimate on how much it will all cost. A home inspector will perform a detailed inspection and find issues that are not detectable on a cursory walkthrough. Having these two professionals on your team is vital.
Finding Reliable Contractors
If you plan to complete one or two flip houses per year, you can probably get by doing the bulk of the renovations yourself. However, if you want to do much more than that, you will need to build a solid team of contractors. Even when doing a flip yourself, there will often be times that you must call in a contractor because the project is too complicated or it requires a permit. Here is a list of the most common contractors that you will need:
- HVAC Contractor
- Drywall Contractor
Where To Buy Inexpensive Materials
Although you will undoubtedly make many purchases at the big box stores during your flipping project, you should not solely depend on them for materials. There are likely other stores in your area that offer materials at much lower prices. Some ideas to look for are salvage warehouses and local building supplies. The most critical time to find these discounts is when you make large purchases, such as flooring for a large section of the house or kitchen cabinets. One discount you can often get from the big box stores is on appliances. They often mark down returned appliances significantly. Just be sure that there is nothing major wrong with them before buying them for your flip house.
Working With A Listing Agent
Although you could try to list the house yourself and save the money typically spent on agent commissions, it is generally not advised. Like with the rehab projects on a flip house, you must determine what is worth your time and what is better to delegate. The time you spend marketing your home and showing it to prospective buyers could be spent generating more deals.
Not only that, but juggling all of the queries and offers from potential buyers can be complicated. Mishandling this process could result in you leaving a significant amount of money on the table – much more than you would have paid an agent to sell your house. Finding an agent that knows your market well and is experienced in selling homes will result in a much smoother sales process and more money in your pocket.
What are the Most Helpful Skills Needed to Flip Houses?
To be a successful house flipper, you will need to develop quite a few skills. And don’t worry, they don’t all have to be perfected upfront. It will be more of a process where they improve as you complete more projects. But here are the skills you should be working on.
Most people thinking about getting into house flipping immediately think they need to start watching HGTV shows to get design ideas and find the latest trends, but success in real estate investing is largely due to how you interact with people. If you can’t effectively communicate with a homeowner to diagnose the problems they are facing and present a solution that involves you buying their house, you will be hard-pressed to get started on your house-flipping journey. But if you can refine this skill and learn the right questions to ask, your possibilities as a house flipper are endless.
Must Be Organized
Once you purchase a house to begin renovating, keeping everything organized is vital. The first step is to lay out a detailed scope of work upfront. This will give you a clear path forward instead of your project evolving as you go. Having a scope of work will also allow you to determine the proper order of your renovations.
Secondly, you must maintain constant communication with your contractors to ensure they are on schedule. Many home improvement projects happen in series, meaning one task can’t begin until another is completed. For example, if your drywall guy is behind and takes an extra week to get to your project, your painter won’t be able to start on time and will have to fit you into the next opening in his schedule.
Lastly, you must keep a watchful eye on materials to ensure you and your contractors have everything needed for the project. Many items may need to be ordered, so it is unwise to wait until something is needed to go to the store and buy it.
Home Renovation Knowledge
Eventually, a house-flipping project comes down to making design decisions based on what is practical, affordable, and will improve the house’s value. It would be difficult to make these decisions and have intelligent conversations with contractors without basic knowledge of how houses are constructed. If you don’t have much experience with home renovation tasks, your best options will be to begin on smaller projects that only require cosmetic updates or partner with someone with more experience with construction.
Even if you decide to hire contractors for the bulk of the renovation tasks on your house, there will likely be some times when it makes the most sense for you to do something yourself. Here are the some of the most common handyman tasks when flipping a house:
- Caulking and touch-up painting
- Patching drywall
- Changing light switches and outlets
- Changing light fixtures
- Laying flooring
- Installing trim
- Changing doors and door hardware
- Installing a new toilet
Are You Ready To Get Started Flipping Houses?
House flipping can be a fantastic way to supplement your income or start a new career. However, as you’ve seen in this article, there is more to it than most people think. And these house flipping tips and tricks are just the tip of the iceberg. For more information on how to get started, check out this complete guide to flipping houses written by a professional house flipper. In addition to the topics we’ve covered here, his guide covers more info on funding deals, marketing, running numbers, and selecting appropriate upgrades for your project.
What are your favorite tips and tricks for successfully flipping a house? Let us know in the comments!