HGTV and other television shows make flipping houses look easy. You just walk in, declare the place a dump, slap some lipstick on it and then sell it for a $200,000 profit. Unfortunately, it’s not that easy in the real world.
House Flipping Tips
Flipping homes is just like anything else: if you want to make money, you have to be good. And in order to be good, you have to be a professional. Obviously, you can’t expect to become an expert right away (that will take years), but you can educate yourself on the basics before you start.
Get a Mentor
Most people who are successful at flipping homes have worked in the residential real estate industry for years. They’ve worked for a home builder, an investor that specializes in flipping homes, as an agent, or for a contractor. They’ve learned how to value a home and what things should cost. If you don’t have that experience, you need to find someone who does and who has the time to mentor you. Plan to meet with your mentor at least once a week to start, and bring with you a list of questions and possible deals to review. Your mentor should be able to help you think through the positives and negatives of each investment.
You’re Going to Need Lots of Partners
Unless you have a lot of cash, you’ll need friends and family to invest with you. You’ll also need contractors and agents you can trust, accountants who can get you the most tax write-offs, and a really good real estate attorney (in the likely event something goes wrong). You should also read about How To Fund Your House Flipping Business.
If you can find a lender to partner with, you will have a better chance of controlling the transaction. The lender should be familiar with the flipping business and be willing to underwrite a loan for your potential buyers in 21 days. Then you can incentivize your buyers to use the lender by allowing them to keep the refrigerator or offering to pay for some of their closing costs.
Know Your Market on an Intimate Level
In order to know which home is a great deal and which home will be a bust, you have to know the market so well that you know why one street is better than the other. Yes, every neighborhood has streets that are better than others. If you want to get into a certain market, you need to drive every street multiple times, attend open houses to see the state of homes that are your competition and talk to real estate agents.
Rethink How You Think About Money
Most house flippers will tell you, a successful flip is one where you make money, not triple your money. They’ll also tell you the price at which you buy is more important than the price at which you sell.
Why is this? The home’s sale price is dictated more by the location of the home than the improvements you make. So you could install granite countertops and beautiful hardwood floors, you could trade a dated shower stall for a marble rain shower, but if the median home price in the neighborhood is $250,000 and you buy the home for $200,000, you’re unlikely to recoup the renovation expense. Because people willing to pay more for a home aren’t going to want to buy in that neighborhood.
In order to back into the right purchase price, you should first determine the highest price at which you can sell the home. Then take 70% of that amount and then subtract the cost of renovations (usually 20-30% of the sale price). The result is the maximum amount you should pay for that property.
Interest rates are still low, which makes home flipping attractive. But keep in mind it’s getting harder and harder for investors to find good deals. There’s more competition than ever before and foreclosures are declining, which means banks don’t have as much inventory to offload at a discount. So you’ll have to get creative.
If you’re new to a residential real estate, professionals advise that you stay away from properties that have anything more than cosmetic problems — at least until you get some experience under your belt. And before you make an offer on a house, go over the deal with your mentor to make sure you’re not missing something. A house is a huge investment and even a small mistake could cost you a lot of money.