If we were to consider everybody who sells a real estate program as completely honest in their marketing, flipping houses would be the “no non-sense”, “big money”, “work from home”, “get rich quick”, “no money down” method we are all looking for. As a beginner these marketing terms are great for selling books and training programs but they do not prepare you for how to deal with real estate in general let alone buying and flipping property for a profit. It is hard work to find capital and perform long term renovations on a single family home and then sell it quickly.
The truth is you can’t learn to flip houses by watching TV shows or a few youtube videos. These resources are great in the beginning when you know nothing at all. They will provide some of the more general information and the terminology such as how to price the house for the after repair value (ARV) but they do not prepare you for mistakes or uncontrollable situations like a market down swing.
How can we avoid getting stuck with thousands in renovation and no market s to sell?
Or how about pricing repairs,.. if you have never hired a contractor or performed repairs yourself how can you possibly create an estimate before buying the house?
The most common method I found to learn this business is reading on the subject, studying the details and by getting started and making mistakes along the way. I wrote this blog as a method to research the house flipping process and learn as many of the mistakes that I can from other people who have already done it before jumping in myself. This allows me to stay focused and research questions without committing any money yet. Most of the professionals I have read start with finding that first house, because its fun!
It’s a great place to start, search for houses on redfin or zillow and start calculating their actual market value, in fact why not do this with the house your living in?
Lets say you find your first distressed house and you go there for a walk through and decide to get started and buy. Not knowing enough, you missed a serious issue that needs a plumber or an electrician or upgrades that require inspections from the city to be up to code. Now your dealing with contractors and city inspections ‘after’ you already purchased the property, calculated your repair costs and repair value and profit.
This hard lesson can cost you plenty of profit or possibly no profit at all and has caused many to throw out the idea that flipping houses is a valuable and profitable business. I think one of the most important first steps to take is finding some good contractors to spot serious issues and create more accurate estimates before you need them.
Contractors
The people who will be doing the work are at the center of every project and your team needs to be as close to 100% as possible. As a beginner you might get lucky and find a property that only needs cosmetic changes like kitchen cabinets, dry wall, painting and some insulation. This work could be done by you instead of hiring a contractor and in many cases investors have started in this exact way. As you flip more houses you will get a feel for the time and cost factor and be able to estimate by just looking but as a beginner you do not have this information yet. Who does?
Another option is to partner with a contractor or someone who can accurately estimate repair costs. There will be a steep learning curve and any additional information will help save on the bottom line and get your business profitable o the first flip.
Flipping a single family home could possibly involve a general contractor, roofers, electricians, pest control, plumbers, HVAC and professional painters to name a few. When the project gets bigger or more complicated you will need to have a contractor to contact and help with an estimation on repairs. Contractors are people like anyone else and they need work, schedules and a paycheck but finding and choosing the right contractor can be difficult. I think the first steps should be looking for ‘trusted contractors’ that can perform some or all of the repairs in a used house. This will help drastically with reducing the risks involved.
Understanding Risk and Reward
The general consensus is that there is actually low risk involved with real estate because of the high value in homes and property. The money lenders are looking at the collateral value so if there is a complete failure of the flip the property can still be resold or another loan provided to pay them back. For the first time flipper there is more at stake as they are learning new skills in the real estate market which has become more complicated through the years. Failing at the very beginning will scare away the first timer as something that’s just too expensive or too hard for them to accomplish.
In general the professional house flipper will shoot for around 10 to 15% profit margin from each of their properties but many exceed that to 20 or 30%. Over time the professional learns to offset the risk as they learn that there can always be surprises. The reward is a large return in a very short period of time and it something that can be repeated throughout the year and turned into a valuable business. Even with experience the pro is still exposed to the same high stress risk as the beginner.
RISK:
- No guarantee on success & profit
- Market changes during remodel and no guarantee on the sale
- Surprise high cost of repairs: electrical, foundation, HVAC
- Difficulties getting permits for remodel
- Unexpected contractor disputes over work or pay
- Changes to the timeline due to any of the above
The risk is easy to see on the first house flip because that inner voice keeps reminding you of each one as you go. Any of these challenges can be overcome and treated as a learning experience even the most serious errors will make you a better flipper and your business more resolute. Lets frankly address each one.
RISK ASSESSMENT:
- No guarantee on success & profit: There’s no guarantees on your job or anything else in life, these skills are just new to you.
- Surprise high cost of repairs: This is a hard lesson that finding good contractors can help you avoid or help you cost accordingly.
- Difficulties getting permits for remodel: Understanding coding and permits are documented by the government, it’s really just paperwork.
- Unexpected contractor disputes: Dealing with challenges and people is part of any business so choose your team well.
- Changes to timeline: You schedule and manage your own timeline each day, if you have kids you’re already a project manager.
My suggestion is to keep reminding yourself of the rewards and to push through the doubt, this will lead to the experience and the risks become easier to predict and deal with. You should remind yourself of the rewards and goals everyday.
REWARDS:
- High return on your time and investment
- Building a skills that can be performed anywhere
- Life goals, like eventually quitting your day job
- Personal achievements & growth
When beginning to search, be patient and look for houses that require mostly cosmetic work that you can perform yourself. This will require more sweat equity but you will end up with a better understanding of the time and effort required to rehab the house. The profit for this first flip might not be the thousands of dollars you see on TV shows but the experience is priceless. The more knowledgeable you are the better you will be at minimizing risk and moving closer to your goals.
There’s a lot of money and paperwork involved with Real Estate so lets look at what methods are best for the first time flipper.
Methods to Flip a House
Understand the different methods available to you for flipping your first house. The professional flipper will already have investors they work with and provide hard money loans for their properties. These loans are very short term, usually 12 months or less, but do not require things like credit checks and pay stubs. For a first time flipper they will be looking at you and your crew or team of contractors to judge whether you will finish the project on time.
Another method to get started flipping houses is the live-in flip. This is where you purchase the distressed property as a normal home buyer where it is your primary residence. During the next few years you complete all of the repairs and rehab work that needs to be done and put the house up for sale at closer to the market value. As a beginner this is ideal as you have much more time to perform the work, make mistakes and finish the rehab than a normal flip. If the property is sold under 3 years you can also avoid taxes. The downside is you will need to include closing costs in your estimate and apply for a mortgage from a bank as normal.
There are other methods available like equity and cash-out loans and refinancing with the seller but these are not very beginner friendly. There is plenty of information on this blog and the internet explaining different methods to buy, flip and rent property you just need to put some time in to learn.
Where and What to Learn
Where to learn?
Well there are TV shows, books, blogs, training weekends, online courses and DVD training sets all over the internet. One of my favorite saying is that you can read 3 books on any subject and know more about that subject than 95% or people. That leads me to believe if I read 3 books, watched a dozen youtube videos and read another dozen blogs I would probably be an expert in the field.
As a first time flipper the paid training services look attractive and if you are the type of person that learns better in a training session then that could be your best bet. Look for someone who has been teaching for a while and has a reasonable cost for their course. The classes are rather expensive and I have heard horror stories about some that train you to to find the houses and they perform the flip and take the profit. Stay away from those.
Reading 3 books and watching some youtube videos on the subject is a quick way to get up to speed and formally decide if you want to do this. You will begin to see similarities in the information and get a better idea of the actual work involved and then generate some specific good questions. This same methodology goes for learning the rehab work and how to do it yourself. Much of a rehab such as drywall, painting, simple plumbing and hardwood floors can be learned quickly and save you on contractor costs.
The best education would come from a mentor where they would take you in and walk you through the process answering all your questions. In our digital age this person does not necessarily need to be local as you can video chat to teach and to ask questions. Finding a guru is way beyond this article though.
Where NOT to learn from?
Reality TV shows are the first to avoid as they are usually staged scenarios created to build drama and keep you watching. The truth is they hire real professionals that are contracted to do the work even if its costly repairs like foundations or additions to floor space. The show does not offer a true view into the work necessary and how to get it done on time.
Online Training is a convenient solution but be careful and check how long the individual has been in the business and teaching. I would avoid anyone who has been flipping houses for less than 10 years since flipping 1 house could take you 6 months to complete, 10 years would make you an expert in my mind. Otherwise you can find answers to many individual questions by searching youtube.
Beginner Stages
1. Mental Preparation
This is one of the most important steps that most people skip when getting started in any new venture and facing their fears. Understanding your mental state and what level of commitment you have to changing your life. This will involve plenty of time to learn the process and then perform the work needed. This could mean months of research, paperwork, rehab and more before seeing any kind of profit on the horizon, are you ready to do what’s necessary?
2. Money and Credit
Some people have a negative relationship with money and tend to ignore things like budgeting, the difference between credit and cash, savings and just general financial subjects. Mostly they get a water bill and pay it with their paycheck. Buying property is not the same as buying a burger or paying your electric bill and you will be dealing with large numbers and plenty of paperwork. The hope is that you can finance most or all of a flip using hard money. Don’t fear your financial situation, understand it so you can find and generate options. This is the time to sit down and have a cold hard look at your financial situation, if you can’t do this then I would suggest staying away from real estate.
- Income sources: Paycheck, retirement account, assets that can be liquidated
- Credit: What amount of credit is available,.. equity, credit cards, personal loans?
- Cost of living: Budget all monthly bills, are there places to save?
- Credit reports & repair: Another scary one,.. get all 3 credit reports and analyze every single item. Start the process to have negative items removed,.. again it’s just paperwork.
- Partners and Investors: Speak frankly with family and friends to see if there’s a financial partner with capital interested in partnering.
- Post Flip Profits: Are you disciplined enough to use the profits from your first flip to finance the next? Create a spreadsheet and run some estimates.
As a beginner the profits from your first flips are going to be crucial moving forward. Lets assume your final profit is $10K, this is after 6 months of working every weekend and your day job too. If you are able to secure financing for most of the project, a portion of this profit may go to the remaining loan percentage for the next flip or into tools or further training. This is capital, not a paycheck.
3. Team
The team of people that will actually do the work is an important step and should not be rushed. In fact as you look for friends, family, contractors and other sources of labor you can include stage 4 and look for distressed properties. Take advantage of the local market and drive by some of these homes with your team to assess value and work. This will also make it more real as opposed to just talking about it. Here are some common contractor skills were looking for:
- Drywall and Painting
- Kitchen and Bathroom remodel
- Replacement Windows
- Landscaping (grass, trees, bushes etc.)
- Electrical
- Plumbing
- HVAC
Be sure to understand the risks and request info on the contractors insurance policies. This will need to be part of your required paperwork too.
While flipping that first house, keep in mind that there is another list of professionals that you should add to your team. These are very important people who can save you time and money as you begin to flip more than 1 house at a time.
- Real estate agents & brokers
- Money lending
- Accounting
- Insurance
An accountant is very valuable and especially if they have some real Estate background. They can recommend some great savings and tax benefits where possible not to mention they would be someone to handle the books for your business. Finding a Real Estate agent may not be realistic when trying to flip your first house. The next few flips you might use them to find properties and subtract their fees from your final price estimate.
4. Finding Distressed Properties
As you review your financial situation and build your contractor team, you can begin searching for the first house flip. To begin you can use redfin.com or Zillow.com to find houses to flip as they have a great free tool to filter through the currently public listings, foreclosures and SOLD properties. Later on you might get tips from your Real Estate agent or a wholesaler but this will train your mind to see the value of property and the market sell price. A great place to start is to price your own home using these tools and looking at the other houses that are similar and sold in the last 90 – 180 days. Create a spreadsheet and begin your market research.
Comparative Market Analysis (CMA)
The CMA is where we compare similar houses in the same neighborhood and see what they are priced at. Create a spreadsheet and begin finding properties that have similar aspects, or compare them with your house. As we move to more houses this spreadsheet will evolve and change to fit your knowledge and make things more easily visible.
What to compare between houses?
- Type of home: Split level, Ranch, Bungalo, Duplex etc.
- Age of the Home
- Square Footage
- Number of Bedrooms
- Number of Bathrooms
- Lot size in square foot
- Garage Size in square foot (1 or 2 car)
- Amenities: Pool, Backyard Patio, pond, etc.
- Target houses that have sold in the last 90-180 days
- De-listed, relisted or price reduced recently
- Same neighborhood
Calculate the After Repair Value (ARV)
The After Repair Value is just what your going to sell the house for after the repairs are complete. Since we have not visited the house yet we have no idea what rehab work is needed but we can still use the online tools to compare previously SOLD houses. As this is the first house we are flipping this information is very valuable.
If the SOLD value is considered the ARV then how much room is there for repairs and profit?
Many of these houses might be For Sale By Owner with a motivated seller and a highly negotiable price. We will not find that out until we visit and do a walk through.
Use the 70% Rule
A Real Estate Investor should limit the amount they pay for a property to 70 percent of the ARV. Basically we are looking at what the property will sell for after the rehab is complete and taking 30% off for the repair costs and profit. Since these are actually estimates, here is an example
- Sells for (ARV): $80,000
- 70%: $56,000
- Repairs: $15,000
- Profit: $9,000
What this means is that the investor should not pay more than $56,000 for the house if they expect $15,000 in repairs and upgrades. The profit will then be around $9,000. This quick math can help to avoid paying too much for houses with heavy repair costs.
What if the repair value was $20,000, would you work for 6 months on this project for less than $4,000 ?
7. Visit and Walk-through
At this point you should have a list of potential properties in your spreadsheet that can be flipped. The next step is to visit them and begin to estimate the rehab costs and any repairs needed. This is where the repair knowledge of a good contractor can be valuable as there are some obvious problems you may want to avoid for the first house flip. The ideal beginner situation is where the seller is motivated and will not or cannot pay for any updates so is willing to sell for a lower price.
If the home is a For Sale By Owner, simply chatting with the owner about any updates or changes or the ages of the furnace and water heater can help create an accurate estimate for repairs. The one thing to remember is to take very good notes and lots of pictures, you may see things later in the images that you hadn’t noticed when you were walking and talking.
Here’s a few of the most common:
- Bathroom needs remodel
- Damaged hardwood floors
- Dated kitchen appliances
- Needs new windows
- Needs new furnace or water heater
6. Back to Money
At this stage you will have spent many hours searching for houses, changing the criteria and updating your spreadsheet. You have visited multiple houses and you have a few that you would like to put in an offer on. Lets look at the financials and make some assumptions.
There are some things to consider for the first flip, one would be if you will be performing any of the work. In many cases the investor saves money by doing some for the work themselves such as:
- Hanging and patching drywall
- Stripping wallpaper and painting
- Painting the outside of the house and garage
- Replacing hardware
- Replacing kitchen cabinets
- Updating the bathroom
- Simple plumbing repairs
The average new home owner or apartment dweller will not have the tools to do this work so there will be a cost for equipment even though you will be the labor. Be sure to consider more than just the materials needed to complete the job. As a result of Stage 2 you should have a good understanding of your credit situation and available cash where these costs may come out of.
For the first time flipper one of the likely lenders will be a commercial bank with a 30 or 15 year loan where you will live in the house, repair it, update it and finally sell it within the next 2 years. This is a live-in flip and will be available to you if your income and credit are good enough to get the loan.
The next lender could be your equity partner, this might be a friend or family that wanted to get involved and either loan the money for a return or partner with you as a business. You will need to discuss all of the costs for the purchase, materials, contractors and fees that you will need to cover to flip the house. If your lucky you may not need to use your own money at all to flip your first house.
The most common source of capital is the hard money lender. The ideal is for the hard money loan to cover the price and repair costs of the property completely. For the first time flipper I would expect the loan to be:
- Higher interest rate
- Possibly include points (more interest)
- May require 20% down from the investor
- Possibly a credit check
- Review your full rehab plan
Using the example above the full amount for purchase and rehab is $71,000. The lender may ask for 10-20% of this as a down payment and this needs to be included with your costs.
For this stage its all about understanding your finances and planning for the business expenses. Find a few different hard money lenders online and talk with them about their interest rates, the properties they like and don’t like and what you may need to do to secure that first loan.
7. The Job
Time is very important as you cannot realize your profit until the property is sold. Manage the project by creating detailed timelines for work and it’s completion. If hiring contractors be sure they agree in writing on the timetable, this will help control how long the project takes and bring the property to the market on time or sooner.
Keep costs as close to what was expected, at this point anything cost overruns will come out of the profits. Purchase materials yourself and deliver them to the job site for the contractor. You cannot afford getting a contractor that “loses” materials and needs much more than estimated.
8. Selling
Since this is the first house flip there may not be a Real Estate agent to handle listing and scheduling showings, this may be done by you. Begin to prepare the house for sale by improving its curb appeal and listing it for sale online. Posting signs on the front lawn and on show days place one at the nearest main street intersection.
If the agent fees were included with the estimate then this would free up time for you to search for the next flip and let the agent do their job.