How to Guide: Fix and Flip
70% of the top wealthiest people make their millions through real estate. For that reason alone real estate, by far, is one of the most lucrative business models for newbie entrepreneurs. Unfortunately when people first become interested in having a career in real estate they turn to reality shows where the perception is you'll flip a house every 2 weeks and make $50,000.
Sorry folks, probably not gonna happen. Its possible! But highly unlikely if your just starting out.
Yes, real estate investors who flip homes, can earn a hefty return over a relatively short period of time. But house flipping involves a lot of work – far more than what reality TV stars make it look like.
So i decided to give our readers insight on what it takes to flip a house. These steps have helped our business grow year over year.
For Starters: What does is it mean to do a Fix n Flip or Flipping?
Fix n Flips are when real estate investors buy a property, performs renovations, and sells it for a profit. In order for a house to be considered a flip, it must be bought with the intent to perform minor renovations and quick reselling. Investors that flip properties tend to take homes that most home buyers aren’t able or willing to renovate, and improve them to the point where they meet the end buyer's demand.
Develop your buyers list
The buyers list is your database of contacts who have expressed an interest in buying real estate. Aside from capturing leads, your buyer list is the most valuable quantifiable asset you have in your business. Any good real estate agent or investors know that the quality of your buyer list will make or break your business.
Here is a list of our top 2 ways (sort of) to build a buyer list:
- Networking Events
- REIA Events
- City Council Events
- Chamber of Commerce Events
- Networking Lead groups
- Home Shows/ Trade Shows
- HBA Meetings/ Contractor Associations
- Social Media
For a more in depth look at how to develop a solid buyers list click here. Check out our blog titled The Investor Pay Day : How to Develop a Killer Buyer List
Have a Pulse on your market
Having a good understanding of your market is important because you must be aware of the prime areas. Having a pulse on your market awards you the wherewith-all to know what area to market to and which ones to stay clear of. For instance if you are new to investing and you're starting with a budget of $10,000, its wise for you to stay away from neighborhoods where the average housing cost $850,000. Conversely you may not want to purchase a property in a neighborhood where it will be hard to sell because no one wants to live there. If you don't know whats going on in your city or understand where the trends are heading, it can cause problems for your business.
So how does one have a better understanding of the market? One way is to get a real estate agent that has years of experience. An agent can target home searches for the right neighborhoods based on the price range and profits you desire. It pays to work with a real estate agent who knows the market like the back of their hand. And then when you’re ready to sell, your agent can use their knowledge to price the house competitively so that you get top dollar. Working with a rock star agent can help you make a smart investment that keeps your finances on track.
Business Plan & Financial Plan
It doesn't have to be the Mona Lisa of business plans, but if you are conducting business as an real estate investor, you need a financial and logistical blueprint to follow. Don’t wait until after you purchase an investment property to make a budget. Know your price range for purchasing a home, making repairs, completing renovation, and selling it before you close on the property.
Your business plan can be as simple as having a budget, a timeline, and project scope.
How much do you have to invest? How much do you want to hold in reserve? Do you have enough to cover renovation draws until you’re reimbursed by your lender?
What kind of scope are you comfortable with? We usually recommend starting with cosmetic updates for the first house flip or two: kitchen and bathroom updates, new flooring, new paint, and new fixtures. Make sure to identify any cosmetic projects as well as any expensive overhauls like plumbing or electrical problems. If you don’t have a background in construction, a contractor can tell you what needs fixing and how much it will cost. Surprise repairs can make or break a flip, so be sure to do your homework here.
House flipping can be a risky endeavor, and it’s easy to see why adding debt into the mix only makes it more dangerous. Here’s why we always recommend you flip a house with cash. The last place you want to be is “Awesome, my offer was approved… but how do I actually come up with the money?!” First, flippers who take on debt for their purchase pay interest for months, which only increases the amount they have to sell the house for just to break even. Second, using debt to finance a flip can cause you to act out of desperation. If you can’t get the house sold, for example, you’re likely to lower your price and cut your profit.
If you must use a Hard Money Lender be sure to find a one who can fund your deal. A viable option is LendingHome funds, where you can receive up to 90% of the purchase price for investors flipping houses and 100% of the renovation costs. When comparing pricing on bridge loans for flipping houses, pay particularly close attention to fees. Interest rates will be high on all bridge loans, compared to long-term traditional homeowner mortgages, but they actually matter less.
You also need to start building relationships with contractors before you buy your first flip. You want to start getting quotes once the property is under contract, or even before. Part of learning how to flip a house is building a network of contractors: general contractors, electricians, roofers, plumbers, painters, HVAC experts. Get to know several lower-cost, well-rounded handymen as well.
Unless you’re doing the work yourself, half of the house flipping business is simply building a network. Contractors are an incredibly important part of that network, along with an outstanding Realtor and home inspector.
Market for Sellers
Another crucial part of learning how to flip houses is learning how to find good deals. That means not only buying below market value, but with wide enough margins to cover your many expenses: two rounds of closing costs, carrying costs during your renovation, Realtor fees, and of course the cost of your time and work.
Before you get there your have to acquire a property. There are many strategies to find below-market deals on homes to flip but it starts with having your foundational marketing items intact.
- Business Name
- Business Logo
- Easy to remember phone number
- Website Name
- Your Business Color Scheme
Additional Marketing material that help attract sellers are:
- Bandit Signs
- Referral Marketing
- Direct Mail
- Pre-Foreclosures Door Packets
- Purchased Internet Leads
- Classified Ads
- Bill Boards
- Door Hangers
- Television Advertising
........Just to name a few, and the list goes on. To see a best practices on marketing for sellers Click here.
Choose 2-3 of the options listed above and focus in on those strategies. Its in your consistency that will determine your progression. If things are not going as planed it will be tempting to switch your method but for the first deal or two i urge you to stick with the ones in your business plan and re-evaluate on how you can improve.
Purchase and Renovate
You found a property and the numbers align. There is profit potential and it meets your business plan. Now its time to start renovation!
As soon as the seller signs on the dotted line the clock starts. Have your ever heard the saying "Time is Money?" Well you want to be sure that your are spending your time wisely. Depending on the contractors that you have on your team, your time can either be wasted or you could save cost by increasing productivity. Be sure to have people on your team who your can trust and work well with.
In our Rehab Reference Manual, we study and execute the 7 Stages of the Rehab Overview:
1. Initial Walk Through
2. Scope of Work
3. Contractor & Job Bidding
4. Contract Signing
5. Rehab Process
6. Contract Closeout
7. Final Touches
Understand that every month that goes by, you’re paying interest and other carrying costs: utilities, taxes, insurance, and any other costs of owning that particular property. In other words, lost money! The faster you can complete the renovation project, the faster you can sell the property and pay off your loan. And the faster you get your payday.
Flipping homes successfully is in many ways an exercise in efficiency. Many contractors will tell you “Oh sure, we can wrap up this project in a week!” Then a month later, they’re still messing around with the drywall. So i'll repeat it again, find Contractors you work well with. It is absolutely imperative.
Time to Sell!
Your aim should be to sell your property at the best possible price in the shortest possible time. Now comes the moment when we use that buyers list we built to market our property. The best option you have is to use your own marketing methods for selling your property. Social Media, networking platforms and direct marketing should all be strategies used to get the word out that you have a home for sale.
Another option is to use your real estate agent for accessing the MLS. Your agent should have a strong high street presence as well as the ability to support you with the a big buyers list of their own. The slight down side to using a realtor is that they will likely take 3% of the selling price. I wouldn't feel to bad about paying a percentage because a home sold with slightly less profits is better than a home not sold at all. To successfully sale a property you must be efficient in pricing the property you must also ensure the presentation is professional but most of all create a sense of urgency.
Many new investors that start learning how to flip a house mistakenly assume they should get their Realtor’s license. And sure, it can save you 3% on a listing agent’s fee, but it costs you in other ways. It costs time and money to take the course and the licensing exam. In many cases, it costs money to join a brokerage team. For your first few house flipping deals, start by working with an expert local Realtor. If you decide you love flipping homes, you can always invest the time and money to get your Realtor’s license.
Fix n Flipping is a very simple business model, but there’s still a lot to learn. You definitely won’t get everything right the first time, and really you’ll probably still make mistakes even when you’ve got tens of projects under your belt. Whatever you do, start by buying at the right price. That’s the one thing that you can’t change as you go, and if you bag a bargain it will give you a buffer against the unexpected costs and overruns you’re guaranteed to suffer.
Stay Tuned, Stay Involved, Stay Prosperous