THE ULTIMATE GUIDE TO HOUSE FLIPPING IN ANY MARKET
House flipping is a fantastic way to make money, but it is not a way to get rich quick. To make money flipping houses you have to buy houses very cheap, account for all costs, sell houses quickly and find great financing. You may not make a lot of money with your first flip, but as you gain experience and learn the business you can make serious money flipping houses. I flip 10-15 houses a year and I average over $30,000 in profit on each flip. I have nine flips in progress and it has taken me many years to build up my flipping business to handle that many properties at once.
HOW CHEAP DO YOU HAVE TO BUY FLIPS TO MAKE A PROFIT?
House flipping starts with how much money you pay for the house you intend to flip. Most people under-estimate the costs involved in flipping and that is why they do not make much money or lose money on their first flip. The 70 percent rule is a great guideline to help flippers calculate if they can make a profit on a flip.
The 70 percent rule states a house must be bought for 70 percent of the ARV minus the cost of repairs. ARV stands for after repaired value and is what the home will sell for after it is fixed up. For example:
- ARV: $150,000
- Repairs : $25,000
- Purchase price for flip:
$80,000 ($150,000 x .7 – $25,000 = $80,000)
Many people make the mistake of paying too much money for a house they want to flip, because they only consider the repair cost and what they can sell it for. You have to have a lot of room between the purchase price and selling price on flips, because there are so many costs involved.
WHAT ARE THE COSTS INVOLVED WHEN FLIPPING HOUSES?
The most obvious cost when flipping houses is the repair cost; here is a great article on how much it costs to repair a house. Besides the repair cost, you will have carrying costs, buying costs and selling costs.
- Buying costs: when you buy a flip you will have to pay closing costs, which can be as much as 3-6 percent of the purchase price if you get a loan. Hard money lenders will charge up to four percent for origination charges; other leaders will charge less but still expect to pay at least one percent. You will have to pay closing fees to the title company, recording fees and possibly an appraisal and inspection.
- Carrying costs: while you own the property you will have to pay for insurance, taxes, HOA fees, yard maintenance, utilities and interest if you get a loan. Interest rates will range from 5 to 20 percent depending on the lender you use.
- Selling costs: to sell a house you will have to pay real estate agents, closings fees, title insurance and possibly closing costs for the buyer.
Here is what the total costs might look like on a flip bought for $80,000, sold for $150,000 and takes six months to sell:
- Inspection: $350
- Appraisal: $550
- Loan costs: $3,000
- Closing fees: $500
- Yard maintenance: $350
- Insurance: $400
- Taxes: $500
- Utilities: $1,000
- Interest: $3,000
- Title insurance: $1,000
- Real estate agents: $9,000
- Closing fees: $500
- Total cost: $20,150
The total costs for this flip are $20,150 without any repairs being done. These costs are typical for a flip in Colorado and assume you use a real estate agent. New flippers can expect to pay higher costs for financing and costs also vary widely by state due to tax rates, if an attorney is needed and many more factors.
HOW MUCH DOES IT COST TO REPAIR A FIX AND FLIP?
Before you buy a fix and flip, you have to determine what the cost will be to repair the home. The repair cost will vary greatly on the amount of work needed, the contractor used and the area you live in. I use contractors to repair all my houses, because it is not worth my time to do the work myself. Finding contractors is tough and one of the hardest parts of my flipping business. I am constantly changing contractors and looking for new people to who will charge a fair amount and work quickly. Here is a great article on how to find a great contractor.
When you sell a flip you want to make sure it is in great shape and the buyers can get a loan. All the major systems should work, the home should be updated and look great. I have a much more details article on how to repair a flip here. I usually spend at least $15,000 on my flips and as much as $50,000 depending on what work is needed.
HOW MUCH PROFIT IS THEIR IN FLIPPING HOMES?
For this hypothetical flip I will assume the repair costs are $15,000, which bring the total costs to $35,000 (here is a case study on a real flip I did in 2014). If you buy the house for $80,000 and have $35,000 on costs, that leaves you a break even point of $115,000. Selling the house for $150,000 would net a profit of $35,000 on the flip if everything goes perfectly. Rarely does everything go perfectly on a flip, because repair costs come in higher, unexpected costs come up and you don’t always sell a house for as much as you plan too. I always add $5,000 into my cost estimates for unexpected repairs or costs that will come up. Even though the initial estimates show a $35,000 profit, in reality the profit would most likely come in at $30,000 or even $25,000.
If you are using hard money to finance a fix and flip your costs will be even higher, because the interest and origination fees are higher than my financing. I have a great set up through my portfolio lender, but it is rare to find such a great deal. If you happen to be a real estate agent like I am, your costs may be less than what I estimate. I save a commission when I buy houses and when I sell them as well.
HOW CAN YOU BUY HOUSES CHEAP ENOUGH TO FLIP?
Now that you can see why you have to buy flips so cheap to make a profit, the question is how can you possibly find houses priced so low? I am in Colorado and our market is extremely hot with rising prices and low inventory, but I still buy 90 percent of my flips from the MLS. I am a real estate agent and I have a huge advantage, because I can write offers very quickly, save money on commissions and pay more for flips than other investors.
Since I save a commission on the front and back-end of my flips, I save $10,000 in some cases in costs that a non agent would have to pay. That savings allows me to pay more for a fix and flip than an investor who is not an agent can pay and still make a profit. If you couple being able to pay more for flips and the fact I can make offers in an hour after a home is listed, being an agent gets me many more deals. Here are some other tips to get a great deal on houses.
- Find a great real estate agent who will find you deals fast and act fast
- Be pre-qualified with a lender and ready to make an offer immediately
- Waive your inspection contingency (only for experienced flippers)
- Offer cash with a high earnest money deposit
- Be willing to close in 15 days or less
- Check auction sites like auction.com for homes that are not listed in MLS
- Look for for sale by owner homes that may be under priced
- Start a direct marketing campaign or find a wholesaler in your area
Many of these techniques cannot be used by beginners, because you may not have cash or be willing to waive your inspection contingency. That does not mean it is impossible to get a deal that you can flip, but you may have to be more patient. I will go months without seeing a great deal that has enough room to flip.
HOW CAN YOU FINANCE FIX AND FLIPS?
I use a local portfolio lender to finance my flips; they charge a one percent origination fee and 5.25% interest rate on a one year loan for flipping. The catch is they only finance 75 percent of the purchase price. I have to come up with 25 percent for down payment, money for repairs and all the carrying costs. I can easily have over $50,000 in cash tied up in one flip. There are many ways to put less cash into a flip, but it will cost you higher interest rates and fees in most cases.
- Hard money lenders will loan more money for flips, but they charge higher rates. Interest can range from 8 to 18 percent and they usually charge from 2 to 5 origination points. The advantage is hard money lenders will loan much higher loan amounts; up to 100 percent of the purchase price and in some cases the repairs as well. To get the entire purchase price financed with hard money you most likely have to be a very experienced investor.
- Private money is a loan from a private investor. It could be a loan from a friend, family member, business partner or stranger. Private money rates vary depending on the situation; I get some private money from my sister and I pay her a six percent rate. Some private money lenders will charge less and some much more. Here is a great site with more information on how to find private money lenders and structure deals with them.
- Partnerships are another way to get started flipping with little money. Many flippers get started by doing most the work; finding, repairing and selling a flip, but they have a partner finance everything. A typical deal is the partners split profits 50/50 for one person doing all the work and another providing all the money.
- Crowd funding has also made its way into the flipping world. The costs are similar to hard money and most crowd funding platforms are looking for experienced investors.
HOW LONG DOES IT TAKE TO FLIP A HOUSE?
I mentioned earlier in the article it takes six months to flip a house; this seems like a very long time to most beginners, but it takes time to flip. Many investors get into trouble because they think they will complete the flip in three months and base all their costs on three months. It takes time to get a contractor scheduled, get the work done, market a house and sell a house.
When you buy a flip most contractors are not able to start right away. The contractor will have other jobs and it may be a couple of weeks before they can start working. The time it takes to complete the work is almost always longer than the contractor says. If he says it will take two weeks, count on the work taking a month. Unless you are having only the basics repaired like paint and carpet, I would expect the work to repair a house to take at least a month and bigger jobs to take two months.
After the work is done you have to get the house cleaned and listed for sale. It takes a week or so to get everything ready and the home on the market and then you have to wait for an offer to come in. If I price a home correctly an offer usually comes in around three weeks after I listed the home. If I over price a home it can take six weeks or longer to get an offer.
To get the highest price for you flip you will want to sell to an owner occupant. In order to sell to an owner occupant there is a 95 percent chance they will get a loan and that process takes from four to six weeks. Hopefully the appraisal comes in at value and there are no issues that cause the contract to fall apart, because you will have to start the process all over again.
Time it takes to flip a house:
- Schedule a contractor and complete repairs: one to three months
- List a home and get a contract: one to two months
- Time it takes for the buyer to close: one to two months
- Total time: three to seven months
This time frame assumes the contractor is fairly quick working, the house is priced right, the buyers get their loan with no problems and there are no other delays. When flipping houses you have to remember that nothing every works out perfectly so plan for delays and plan for a six month turn time.
WHAT IS THE BEST WAY TO SELL A FLIP?
Many flippers try to sell a house for sale by owner to save money on a real estate agent commission. This is a huge mistake if the house flipper does not know what they are doing. The best way to sell a house is to use a real estate agent, because they will market it better, price it better and get it sold quicker. If you under price a home you will leave money on the table and if you overpriced the home you it will sit on the market and sell for less than if it was priced right.
Here is a great article with more information on why you should use an agent.
WHAT ARE THE RISKS OF FLIPPING HOUSES?
There a lot of risks when you flip houses, but if you do your homework and plan well you should make money. The biggest risk is under estimating the costs of a flip and losing money or even the house, because you are too stubborn to sell for a loss. No matter how nice a house is you cannot sell it for more than market value. If you have had a house for sale with a real estate agent for months and don’t know why it is not selling, you probably over priced it. It is better to sell a home now and make less money that to hope that prices will increase or a special buyer will come along.
Flippers fear a market change more than anything because it takes time to flip and a lower market means less profit. If you follow the guidelines like the 70 percent rule you should be able to make money flipping even in a down market. Many flippers went bankrupt during the last housing crisis because they bought mediocre deals assuming they would make money because they market would always go up. When they market went down they did not lower prices and take their losses fast enough and they could not sell the houses.
I have flipped houses since 2001 through good and bad markets. If you buy houses cheap enough and sell them fast enough you can make it through the down markets and make a lot of money in the up markets.
House flipping is a lot of work, but is a lot of fun as well. I make a great living flipping houses and it is not even a full-time job for me. I also spend time selling houses as a Realtor, running my real estate team and running this blog. The income from flipping is a great way for me to buy more rental properties, which provide long-term income. Flipping has also taught me how to find great deals for rental properties and how to run my business better. If you want to start flipping houses it is not something you can spend a couple of hours on a week and make $50,000 on in two months. It takes time, hard work and experience to become a successful flipper.
For more information on flipping houses check out my book Fix and Flip Your Way to Financial Freedom. The book is $9.99 and available at Amazon as a 171 page eBook here. You can also buy a PDF version of the book in the Invest Four More store.
This article was written by Mark Ferguson and published on December 5, 2014 on the InvestFourMore website.