TV shows can make flipping – when an investor buys houses and sells them quickly for a profit – look easy.
Not so fast, say experts and flippers alike.
“There’s a lot of moving parts in house flipping with serious financial implications if you overlook something,” says Audra Walters, a real estate agent at Front Porch Properties in Charleston, South Carolina. “Failing to get a good estimate for renovations or not securing proper permits could cause delays and lead to massive losses.”
For Jerryll Noorden, a former NASA robotics research scientist who now flips three to four houses at a time through his Connecticut real estate firm, the hardest part was finding the funding to buy properties.
“Asking other people, including lenders, for money was a horrifying thought,” says Noorden, who started flipping houses in 2016. “I found an investor forum online and asked, ‘If I find a deal below market value, would anyone be interested in paying for the house and repair costs and we split the profits?’”
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While most laughed at the notion, one investor agreed. In the end, they made an $80,000 profit despite repair costs doubling and the project taking 11 months to complete.
House flipping can be lucrative when done correctly. Here are some steps to boost your chances for a successful flip.
Study the market
The best opportunities are found off-market and outside of sites known as Multiple Listing Services (MLSs), where brokers can list and see properties for sale, advises Nathaniel Butler, a marketing manager at Washington Capital Partners in Falls Church, Virginia.
“These properties can be found using off-market dealer platforms, wholesalers (people who find a property, get it under contract, and assign it to another buyer who closes on it), contractors who work on flips, and by ‘driving for dollars’ through neighbors with distressed properties.”
Don’t be afraid to enlist an agent, too.
“Find an agent who understands the local real estate market, takes the time to educate you, and can recognize a good opportunity,” says Robin Kencel, a real estate broker for Compass in Greenwich, Connecticut. “Understanding what the market will bear for the property in that location is the key to a successful flip.”
Ask fellow investors if they know of any agents who have experience working with house flippers. The upside for agents, Kencel says, is those who provide astute and savvy business advice are well positioned for a long-term relationship with the investor as they buy and sell properties.
Find the right flip
Avery Carl, a real estate broker in Nashville, Tennessee, flips houses and scours neighborhoods to find properties below market value.
“Look for houses that are not well maintained with cracked windows, peeling paint, and overgrown grass,” says Carl.
She eventually bought and flipped six properties over a few years, buying “lipstick flips” that only needed carpet and paint. Her strategy? Buy a $100,000 house, add $40,000-$50,000 in value, flip it, and net $15,000-$20,000 in profit.
Timing is key says Kencel, the broker from Connecticut: “Look during the holidays, at the end of the year, and in the summer,” periods when fewer people are hunting for houses. “Keep your eye on the ball when others are looking elsewhere.”
Set a budget and timeline
Noorden says first-time flippers must understand the costs associated with the entire transaction, plus the value of the house once the repairs are done.
“People lose money on closing costs, money-lending costs, seller’s agent commissions, holding costs, contingency costs, utilities, construction and rehab costs, and more,” he explains. “In order to account for these costs, you have to buy the house at the right price.”
That means figuring out the after-repair value (ARV), which “is the projected value of the house after it is completely renovated,” Noorden says.
A lot of buyers use what’s called the 70% rule.
Stefano Grottoli of Orange Sun Investments in New Jersey offers this example: “If the house you’re looking to buy will be worth $200,000 after it’s remodeled and you would have to spend $50,000 to rehab it, then you should pay no more than $90,000 to purchase the home.”
Let’s do the math:
$200,000 (ARV) X 70% = $140,000
$140,000 (70% of ARV) – $50,000 (repairs) = $90,000 (maximum purchase price).
“Of course, your first offer would be much less than $90,000, but even at that price, you’re on track to make a good profit if no other issues arise,” says Grottoli. “A good contractor can help you to determine repair costs, but make sure to hire an inspector before buying to see if there is any black mold, termite damage, an underground oil tank or foundation damage.”
Either way, investors should always allow wiggle room in their repair budgets for unexpected or unforeseen expenses.
You also need to set a timeline.
Manage your team
Rehabbing a property is a complex undertaking. Hire a team of experts on each project including an architect, contractor, inspector, lender, CPA, real estate agent, and real estate attorney. Despite having these experts on your side, remember, you are in charge.
“Give contractors a detailed scope of work, with a budget per item, and deadlines for each phase for completion,” says Grottoli. “Never ever give more than 10% down before the actual work begins and don’t abandon the house to the contractors. Always supervise their work.”
Steer clear of over-improvements
It’s the No. 1 mistake many first-time flippers make, says Carl, the Nashville broker, who also buys and holds properties. “Does a ‘B’ neighborhood warrant the most expensive marble countertops? No, a nice-looking solid surface counter is fine,” she says. In addition, Carl says don’t become emotionally tied to a property.
“Do what needs to be done to get the value out of the property,” she says. “But don’t make it a vanity project.”