House flipping is, essentially, buying a house or real estate with the intent to sell it for profit. The logistics can get pretty complicated; there are a lot of decisions to make from the beginning to the end. These decisions include: Where should I buy? If I purchase a house in an up-and-coming neighborhood, am I banking on the increasing value based on the neighborhood? What upgrades need to be done? Do I overbuild and/or over-develop the property to attract higher-end buyers? If all goes well, there should be a nice profit. What if something goes wrong? From under-budgeting, timing issues, someone breaking or stealing equipment/supplies to what if the market drops before the house is ready?
How Real Estate House Flipping Works
The Difference Between Experienced and Inexperienced Real Estate Investors
Inexperienced real estate investors make a lot of wrong decisions based on emotions. The experienced real estate investors are not emotional, but instead understand that things will go wrong, market conditions will shift, and overbuilding is usually not a good idea. Above all else, experienced investors always have an exit strategy.
Are you paying attention to interest rates? Do you have a good reputation for producing a quality product?
The art of flipping houses can sometimes bring you to moral dilemma. Some people are losing their houses due to health, finances, unemployment or other problems that were outside of their control. Emotions run high, sellers are in dire straits and you’re coming in to buy the property well below market value. In California, you have to ensure that you disclose you are buying the house to make a profit. Do you have all proper disclosures done? The odds are you’re not a licensed real estate agent; in this event, make sure you’re working with a professional when you go to purchase a property and when you go to sell.
House Flipping Costs
There are so many shows about flipping houses on cable TV that it appears everyone is flipping houses today. They don’t show you the real numbers, though: points, interest rates, pre-payment penalties, junk fees, holding time and costs (interest on the money), property taxes, commissions, request for repairs, hazard insurance and even HOA fees when applicable.
You need create a realistic budget and stick to it. When preparing your budget, make sure you add in unforeseen costs. (Experienced investors have an idea of this number, but if you base it on the total rehab cost, I recommend adding between 20 and 25 percent.) Coming up short in the end and not having the funds to finish, then going back to the investor will only make them question your ability to make good judgment calls on future projects. When looking for financing, make sure that you inquire about the points charged, the interest rate, any junk fees and appraisal inspection fees that they’re going to charge you and how much they will loan you on the project.
Tips for Flipping Houses
Buying is Where You Make Your Money When Flipping
If you pay too much money for the house, no amount of upgrades are going to bring you a return on your investment. Before you buy a property, do you own due diligence. Too often I see people trying to wholesale properties where they indicate what I can expect for cost and resale value. Rarely are they even close! Never once have we had deal brought to us where the numbers were in our favor. Always do your homework and work on your numbers before moving forward with a purchase. Never pay too much for a property with hopes you will make a profit. Margins are the key to staying in the real estate flipping business.
House Flipping is not Emotional
House flipping is a business. If the numbers do not pencil out, move on. We all fall in love with a neighborhood or a house, but do not get attached. Buying in areas you are comfortable in makes sense, but emotions will get you trouble. You cannot always rely on being the highest priced property and selling it quickly. Getting stuck holding on to a property for too long will eat at your profits.
Knowing Your After Rehab Value is Critical
If you do not have access to the MLS or a great real estate agent you can count on, then call a couple agents to get their opinion on value. Have them email you the listings they are using for comparable properties so you can click on the listings. Pay close attention to the photos of the interior and exterior. This will help you gauge the condition, upgrades, and work you need to do in order to get your house to sell for the same price. Set your budget accordingly to the work needing done on the property you are buying.
Understand the Market Conditions
Be sure you are paying attention to interest rates, time on market, and housing trends. Make sure you know what is going on and ensure you have a solid exit plan in place. Too often you set a sales price you are going to achieve in your mind that you are not willing to budge on. If it is on the market too long and you do not have it priced right, it will lose value by the day just sitting. Do not fall in love with the home and expect a certain price, it will only sell for what the market bares. If you anticipate a two month rehab and the market is dropping, at what rate and where do you need to have your home priced then to sell. Work backwards with your numbers, if it does not make sense, walk away from the purchase.
Inspections and Details of a Property
Does the property have a sprinkler system installed? Whenever someone brings us a deal and we ask that questions, it is like a deer caught in the headlights. Simple to overlook, but these little details add up. For example; we purchased a large home on a big lot that had dead grass. We finished the inside and budgeted laying down sod. As we get ready to lay the new grass down we discover there was no irrigation system installed. We ended up spending over $5,000 to have the electrical, valves, timer and sprinkler system installed. What about wiring? If it is an older home you will more than likely have to have the electrical up to code. We had spent over $8,000 on a older home that required us to updating the electrical. Again, these are lessons learned as you become more and more experienced in the flipping business. Work with contractors who will point out items if you are no sure. We recommend before you purchase, do a home inspection and take a contractor with you.
Hire and Build a Great Relationship with Good Contractors
When flipping houses, time is money. You cannot be at the jobsite 24/7 and you need to rely heavily on your contractor performing as planned. Before you start the project, have time lines in place and follow up. Today, everyone has a cell phone with cameras. Have your contractor send you at the end of each day photos of project with updates. Make sure you stop by the project at least once a week. Everyone should know the saying, "when the cat is away, the mice come out to play". A great way to measure your contractors' performance is to monitor it all times. Two of the most important parts of flipping a property is staying on budget and keeping to your timelines. Checks and balances in place will help keep you focused and profitable.
Return on Investment
Everyone can tell you in their opinion what items need to most amount of attention. It is a proven fact that future homebuyers look at the kitchen and bathrooms as the most important aspects of the home they are going to purchase. Pay attention to all the other details of the property. If you have popcorn ceilings, remove them. Do the little things like replace old doors, clean the carpets, or even replace the carpets if needed. Take your personal ideas out of the equation when selecting color choices. Neutral colors will usually get your home the fastest and will almost always get you a higher sales price. Be smart when picking your elevations for the remodel. Do not over-build or under-build for the area. Keep it simple and clean. Set your standards high and you should be able to make a good amount of profit in your flipping business.
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