Flipping Homes...Flipping Houses... What is everyone flipping over?
In the past five years, you've obviously heard the buzz surrounding flipping homes. There's a new TV show popping up weekly, it seems. And it's hardly even possible to keep track of them all these days.
But, what's the real scoop behind all the "flipping houses" buzz? And is it right for you?
In this article, we're going to dispel some of the myths surrounding flipping homes and also give you the steps in case you want to jump in.
First off... the term "flipping houses" often refers to two different things:
1. Wholesaling - also known as assigning the contract - is when you simply put a property under contract and sell the contract to someone else, usually another investor.
2. Retailing - or rehabbing - is when you actually buy the house you are going to flip, do the repairs, and then sell the house, usually to an end buyer, or homeowner.
On TV, they're showing the latter: buy-fix-sell.
There is a lot of money to be made flipping houses, but if you don't do it right, you can also LOSE a lot of money. What you don't see on the television show is how they find their properties, how much it costs to acquire the properties and, in most cases, the profit. It's funny how these programs very rarely tell you HOW MUCH the person REALLY made from the deal (not the gross profits, but what they put in the bank after all is said and done).
So, how do you go about flipping homes (aka House Flipping) the RIGHT WAY - where you make a good chunk of money in a relatively short period of time? There are really only 7 steps to flipping houses. And if you follow them, you will make money!
Step 1: Flip A House Close to Your Home
Look in your own backyard for deals. Too many people look at properties that are too far away for their first deal. I know from firsthand experience. The first house I flipped was 4 hours away and it took a lot out of me. You want to be close enough to supervise the job and/or to work the house at night and on the weekends. Plus, you'll probably have a better idea of the values if the property is in close proximity to where you live.
Step 2: Find the Right House to Flip
Not every "deal" is really a deal - even if you can get it cheap! Keep in mind the location of the house you are flipping. Is it in an area where people are buying? Or is it in an area dominated by rentals? Pay attention to the condition. For your first few deals, look for properties that need cosmetic repairs only. Cosmetic repairs include paint, flooring, kitchen, landscaping, etc. Save the houses that need structural repair, roof repair, HVAC repair, major plumbing, and major electric repair for more seasoned investors. You could open up a can of worms that you're not able to deal with financially and from a time perspective.
Step 3: Have A Through "House Flipping" Inspection
A "House Flipping" inspection is slightly different than your standard home inspection. You're going to ask your inspector to look thoroughly at the 5 major systems (plumbing, electric, roof, HVAC, and structure). The cosmetic repairs will be less important since you're going to be renovating the home. Expect to change out ceiling fans,
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cabinetry, flooring, etc. These are the reasons you're getting a great deal in the first place. You don't want your inspector to "skip" the other items, you just don't necessarily need to know every hinge or piece of hardware that's off.
If your home inspector can give you a ballpark estimate of costs, that's all the better. This way, you've got a second set of eyes looking out for you.
*** BONUS TIP *** You can often use a home inspection to ask for credits or renegotiate the purchase price.
Step 4: Don't Get Emotional
Flipping a home can be emotional by nature. Murphy always rears his ugly head when you least expect it. So, don't become so desperate! Don't let your emotions get involved. If the numbers don't work, move on to the next house. There are plenty of homes on the market to flip and there's no reason to take on a bad deal just to do a deal! On the "flip" side - no pun intended - many people believe their improvements have increased the value of the property above the original value they had estimated. This can be VERY dangerous because you can wind up holding the property longer, making less money, and getting left with a bad taste in your mouth. For instance, they estimated the property would be worth $250,000 at the beginning, but wanted to "test the market" at $275,000 for a few weeks. This is not recommended as the majority of traffic will come in the first 2 weeks that follow after you first list the property for sale.
Step 5: Know Your Numbers
Late night infomercials and shows like "Flip This House" or "Flip That House" don't get into the real details of the deal. You hear stories like this: investor buys the house for $200,000, put $25,000 worth the repairs into the home and sell it for $250,000, putting $25,000 into their bank account. These don't take into account buyers closing costs when you buy - holding costs including taxes, insurance, utilities and mortgage payments - and selling costs when you finally sell.
In the real world, you must know:
- Purchase costs: Upfront mortgage fees, attorneys fees, regular closings fees, title, survey, etc.
- Carrying costs: It's more than just the repairs! When you're flipping real estate, you're likely paying higher interest rates than on, let's say, a primary residence or second home. In addition to the repairs, you've got to consider monthly payments, taxes, insurance, utilities, etc.
- Selling costs: Again, you've got closing costs and possibly real estate commissions to consider.
Step 6: Make A Plan... And Stick To It
Create your "House Flipping" plan and stick to it. Decide what you're going to do, when you're going to do it, and how you're going to do it before you even close on the property. Then, you're simply managing the project and tracking your progress - not reinventing the deal every other day. You'll know, at any given time, where you stand on the deal. You'll stay focused by keeping the bottom line in front of you all the time.
Step 7: Expect the Unexpected
Any time you're flipping homes, you'll run across SOMETHING that you simply didn't expect. Whether it's an issue that pops up 2 hours before closing that needs to be handled or a big surprise when you peek behind the drywall that you had to replace! You'll almost always run at least a little over budget or hold it a little longer than you anticipated. But at the end of the day, you'll have the satisfaction of taken an ugly house and turned it around and depositing a healthy check in your bank account. Keep your expectations in check and you're in for a big pay day!