Learn to Fix and Flip with Our Easy House Flipping Guide
Welcome, we hope that you find this as a helpful house flipping guide, where we highlight and discuss the steps to become a flipper and how to flip a property. Let’s dive in and get right to it!
Considerations Covered In This House Flipping Guide
It may sound obvious, but do you know what house flipping means?
Know your situation. You should be acutely aware of how much money and time will be able to give to your flipping business.
Do you have the skills to pull this off? If not, are you able to get the help you need to be successful?
You will need to locate a discounted or distressed property. Having more than one option allows you to do your due diligence and only move forward with the best deal for you.
Contract on a property. Make an offer to buy a property and get the deal accepted. You can then start to gather all of the information your lender will need.
Apply or a loan to secure funding for your project. Seek funding options that are the best fit for you and your goals.
Get after it and rehab the property. Stay on schedule and always maintain within budget.
List to sell the property. You should be staging, marketing, showing, and getting it sold! A quick sale will be more profitable, so make it happen!
Close on the sale and reap your rewards. Once you close, you will receive your profit from the sale of the property. Now you can relish in the money you made.
These are the high-level items you should consider. As you know, house flipping is a profession that requires a great deal of effort. Ok, ok, we committed to a complete house flipping guide, and we have not forgotten. Read on, and we will dive into each of these steps in more detail.
Who Does The House Flipping Guide Help?
Flipping has become a mainstream term, as it is on a ton of TV series and internet streaming shows on various networks. There are a lot of people in the game, even celebrities. Besides all the hoopla, flipping houses means that you buy a property at a discount and sell it for a profit.
Fix-and-flip refers to the act of buying an investment property, fixing it up, and then selling it for a profit. For this to happen, you must get the property into a condition where it can sell for a higher price, while staying on budget. However, fix-and-flip does not mean to clean up and decorate, or to renovate a personal home.
Fix-and-flip shows will rarely show a flip that results in a loss or is just break even. Not to mention, they speed through most of the details and effort involved in the original property search. They also don’t go into what it takes to obtain financing and the different types of loans and lenders that are out there. Then there is the actual work that goes into getting permits, dealing with regulations, codes, committees, and HOA’s before you can even attempt to do the renovations, which is a crucial step to any fix-and-flip. The trickiest part is that if you don’t do all of this right, you may not make a profit. This house flipping guide is not a guarantee of success, but it does offer guidance to help you determine if a career in real estate fix and flips is right for you.
Be Honest With Yourself
You need to be aware of what you are good at, as well as your weaknesses. What can you successfully do yourself and what is better left for contractors.
Marketing Your Fix and Flip
While this is not what you may think about early in your flip, but you should always be marketing your properties. You need to be able to find discounted properties, and do it before anyone else buys it. Great deals help you do profitable deals. Marketing is not easy, and it takes money and time. Those on limited budgets will need to spend more of their own time to fill the marketing void.
Can You Negotiate?
Working with buyers, contractors, and real estate professionals, you need to be able to negotiate and execute on a lot of deals, sometimes several a day. You’ll also be developing relationships and building your contacts list. While some people are naturals, others can struggle to have the confidence to negotiate. If you cannot negotiate deals, you should probably find a partner who can or not get into this line of work. So you need to ask yourself, can you negotiate? If not, can you learn to do, either on your own or through some classes? Most people get better over time if they put in the effort to be successful.
Bean Counting Is Not Fun But the House Flipping Guide Says To Do It!
There is no real surprise; there is a need for proper accounting. Accounting starts at the planning phase through to closing. You need to be able to calculate profit and loss for a fix-and-flip, and you can’t just subtract the property purchase price from the sale price. You should always consider all of the costs associated with a fix-and-flip.
Careful study, understanding, and calculation of these costs will likely determine whether your deal will be a winner or a loser. What you don’t know can hurt you, so plan and consider everything, including costs you already incurred as well as post-sale or closing fees. In the end, you will need to be able to handle your accounting or hire a good accountant.
Do You Have an Inner Bob The Builder?
Getting dirty and putting in some sweat means more money in your pocket. Tearing things down is how it all starts, but there are many jobs to complete when you rehab a property. You need to get involved even more when it needs some significant re-construction. You should always remain clear regarding your skillset and be realistic.
The other thing you should become an expert on is understanding the permit process. You should also know the laws in your area and be aware of any safety concerns. On top of that, municipal inspectors will likely encourage, if not require, you get licensed trades like electricians and plumbers to sign off on the permits. By learning what is legal and what you can do, you can understand what work you can or cannot do yourself. In addition to inspectors, some lenders require that licensed professionals complete the job, oversee it, or inspect and sign off the permit.
You need to know your margins. If you must cut corners, use low-quality materials, or there are quality issues, you are on thin ice. Don’t force a deal that is not good. It is easier to sell a property that has been rehabilitated and done well.
Dinero, Cash, Money, Scratch, Capital
No matter what you call it, you need it. Flipping houses will require cash. The best part is that it does not have to be your dough. You should also understand that a loan will likely not cover all of the expenses associated with flipping a house. However, many of the costs can be included in a mortgage to help buy and rehab the property.
Unplanned costs can kill the profitability of a deal, but they will occur. It is your job to minimize the risk of losses that put profit at risk. There are costs for everything, so plan as best you can.
Depending on the loan terms you negotiate, a loan may cover a good chunk of the rehab and purchase costs. However, you will need cover costs that arise once you secure the funding. Once you start the rehab, finding costly additional charges to repair structural, electrical, problems with the foundation or plumbing problems can all quickly become profit sinks.
Even if you get financing that works for the deal, your fix-and-flip funding, like the funding we offer at Abbey Mortgage, you will likely run into costs that are not covered by your loan. If costs become untenable with your cash reserves, you need to know where you can get more. Getting hit with these costs may require you to get creative by using credit cards, credit lines, second mortgages on your residence, or other sources.
You Need to Be Resilient and Consistent
Being resilient is easily the most critical thing on the list. Resilience will help keep you moving forward as you overcome issues as they manifest. The reality is there will be challenges you will need to overcome.
It might go smoothly, but You will Probably Have Issues If you realize a deal is a losing deal, just walk away. Even when you walk away from bad deals, you will eventually lose money. Fix-and-flips are investment deals and therefore are subject to profits and losses. With experience, you’ll figure out how to mitigate your risks and minimize financial losses. However, many investors give up when they experience failure.
Can You Fail and Learn?
Do you have the ability to accept failure and take ownership of it just like you would if it were a success? Can you switch tactics and resolve issues with creative solutions? You alone hold the keys to success regardless of anything else.
Buy The Right Property For You As An Investor
When you find excellent properties, you maximize your profit potential. Fix-and-flips can seem incredibly hard as a form of investing that scares away many investors. Coming to understand when a property is ideal for a fix-and-flip is crucial to success. Many investors check out a lot of deals to find one that works in their investment strategy.
Don’t Get Over Stimulated
New investors can quite become overzealous with the first profit estimates for a deal because they fall in love with a property. Maintaining your composure will let you walk from bad deals, which is absolutely a big chunk of being successful in real estate investing. The property should come at a significant discount. A discount helps ensure renovations can be performed on budget and not end up costing you more than the sale price.
Don’t Invest In a Property No One Wants
Finding a suitable property is part of the battle, but who wants to buy it? If the property is in an area with a sound buyer pool, it will usually sell quicker over properties in depressed areas. Make sure there are buyers before you buy the property to ensure a quick sale. Checking the property out with your contractor will help understand the condition of the property. You can then review comparables with your realtor to review current property listings and sales price for comparable properties in the area. Other recent sales usually help you make investment decisions, or even whether to continue at all. Always use a variety of approaches to finding properties. This way, you will have several options to choose from when you are ready to pull the trigger.
Whoa, Your Rehab Blew Away the Johnsons
Outdoing the Johnsons is not always a good thing. You could end up hampering your ability to sell a property that you overshoot the neighborhood. If the result of your rehab means the property is no longer comparable to homes in the market, then you could struggle to find a buyer.
Set The ARV Low
The After Repair Value or ARV is a significant number to understand. It is the number that you base what the property will be worth after the rehab. ARV is calculated based on comps, and comps are the basis for profit calculations. If you make money based on using the lower-valued comps as your ARV, then when it sells for more, you score! Evaluating ARV will help you know if a deal is tight, and if it is, the deal might not be such a great one.
Get The Deal Contracted Fast
Sometimes, new investors will be intimidated by inking a deal. Getting good at negotiating can be intimidating to some people, even stopping some from moving forward at all.
Have Cash Available to Cover Earnest Money
Earnest money is given to the seller to hold the property. Now you can have the property inspected, and the deal assessed to help you to decide if you want to flip the house. Remember that careful wording in a contract and prompt completion of obligations will keep your earnest money returnable. While you negotiate a sale price, remember to negotiating earnest money is on the table as well. By doing this, it gives you some room in case you need it at some point. A third party should hold the earnest money. If you do not move forward with the deal, you can often get your money back if you operate within your contract terms. If you have an excellent real estate agent, who also knows the market, you should hang on to them.
Get the Funding That Is Best For Your Deal
Private loans and hard money loans are the most common. Lenders who know what they are doing will be motivated to lend on a profitable deal. Due to their loan terms, many house flippers will discover very quickly that a suitable private money lender is worth their weight in gold.
Beyond private and hard money loans, house flippers will also leverage lines of credit, unsecured loans, credit cards, and secured loans. You might even be able to fund a small fix-&-flip with credit cards. It is not uncommon for an investor to leverage several different lenders or funding sources to get a deal done.
When you seek out a lender, always remember to consider all associated costs for doing the deal. However, if you make your investment decisions based on interest and points, you may be short-sighted in your evaluation. You should keep in mind that hard money and private loan interest rates and fees are always going to be higher than a standard loan because of the inherent risk the lender takes. First, you should determine if your lender will loan you money in the first place. We find that many new investors get their advice from forums or Facebook groups. You can get useful information, but beware and stay skeptical of offers that are only available online.
When To Negotiate Better Terms
You are experienced at flipping houses and can present a resume of successful flips
You have cash and will offer a large down payment.
You have excellent credit and a FICO score over 750.
You have a personal relationship with someone who will loan you money.
When Getting a Loan is Harder
You have not done a fix and flip before.
You can’t come up with 10% or more for a down payment.
You can’t or don’t want to make monthly payments.
You have bad credit.
Ask Your Lender The Right Questions
You and your lender will need to negotiate the actual loan costs, points, and interest. You should be asking questions, such as these.
Do you disclose all fees upfront or when you offer a loan?
Do you charge a prepayment penalty?
Do your loan terms require monthly payments?
What are your terms to extend the loan?
What are your down payment requirements?
Do you have a minimum credit score you will accept?
Are you looking for experience as a house flipper?
Will you review my scope of work and rehab plans?
Do you do loans based on ARV?
Are you willing to help calculate if the deal will be profitable?
Will you also add rehab costs to the loan?
What restrictions are there?
Getting The Rehab Done Is Harder Than On TV
Watching as a house gets transformed can be exciting, which is why house flipper and property rehab shows are famous. However, in a real deal, there is a lot more than the sped-up TV episodes that only show the highlights.
Complete All Work On Schedule
Managing rehab projects, especially larger ones, requires skill, innovation, and dedication. If you do not adequately manage everything, you can quickly lose money. Experienced contractors can be the key to staying on schedule. Ultimately, you must successfully orchestrate the workflow of all the subs and workers while staying within your budget and scope of work.
Have The Right Contractors For The Job
The quality also needs to be high and done to code so it will pass inspections. To make this happen, unless you are one, you will likely need a licensed contractor. As a lender and investor, we highly recommend that you not do all of the work on your own. Here are some reasons we say this. Some cities and counties may not allow a non-licensed person to sign off on electrical, plumbing, and HVAC work. You should always check and know the permitting process, regulations, and laws for your area. Most lenders require you have licensed contractors bid this work. Contractors help to ensure that costs and schedules are reasonable. Some lenders will only release final funds after contractors have signed a lien release.
List The Property
After your rehab is ready to go, what will happen? You sell, sell, sell! We detailed some things to consider when you finally get to this point.
Partner With a Good Real Estate Agent
An excellent realtor will possess knowledge as well as bring resources and connections to help ensure the property will sell quickly. As you acquire more experience, you will find you don’t need as much help. However, you will probably figure out that an excellent real estate agent will be their weight.
Do Showings and Do Them Often
You will want to pull in as many potential buyers as you can. You will want to limit the days on the market. Which you calculate from the first day you listed the property through the day the property is under contract.
Set The Asking Price
You should not list the property for a ridiculous price. We all want to make a ton of money, but be reasonable. So, how do we determine the asking amount? Go back to your initial valuations. If it took a long time to complete the property rehab, you should consider if property values have remained consistent. However, in the end, your asking price should be set near the ARV to draw interest and capture potential buyer interest.
Have a Realistic Timeframe
Your expectations need to be realistic. Prior experience with buying or selling a home will help you set an expectation as real Estate deals take time. Slow market conditions can slow down your timeline. Selling a property can take six months 30 days, depending on the property demand and market conditions. In any case, do not count on the property selling that fast, but if it does, bonus! Be flexible for the right deal. If a robust potential buyer wants additional upgrades, maybe consider doing them. Lower priced properties, in good condition and are also in a desirable location, will go faster. Keep in mind that most buyers will be using traditional mortgages, which take up to 6 weeks to close.
How Do I Know When I Get The Best Offer?
If an offer results in a profit, you should probably take it unless you are sure a better deal is coming. If you are paying extension fees or if the lender has no prepayment penalties, you will preserve cash.
Profit From Your Efforts
The end is near! You are on the final leg; it’s time to close the deal. You might be asking, what will the closing process be? What will I need at closing, and how long will it take? As far as time goes, plan on it to take an hour or so. Also, besides yourself, any partners will need to be present, all with have valid photo id’s in hand. Partners should be at the closing, whether they are required to sign anything or not. If you are required to bring funds to the closing, you must have the funds with you in an agreeable form from the title company or closing agent.
What If I Still Owe Money After Closing?
If you owe money to anyone else or you borrowed money, not covered at closing will need to be paid. It is ill-advised to have significant transactions and funds transfers outside of closing.
Thanks for Reading This House Flipping Guide
Robert Kearney from Abbey Mortgage here to answer your questions about house flipping and the funding options we offer. We can work with new investors, first-time flippers, those that have credit issues, and more. Keep in mind that we are looking at your probability of success, or if you fail, our ability to reclaim our capital! If you have the drive and talent, we would love to help you learn how to flip houses and get the funding you need!