US: Flipping Houses
Updated: Sep 19
On YouTube, you will see infomercial of people trying to sell courses on how to make money flipping houses. It is a fact that you can create excellent income flipping houses if it not treated as a get rich quick scheme. It requires an absolute commitment like rolling up your sleeve and get your hands dirty to fill voids where ever needed. It is hard work and takes discipline in time management. It also requires startup money to invest. However, real estate is one of the only fields that an average person can increase their income within a few months and, within a few years, become a millionaire. The plan is simple; you buy a distressed property low and sell the repair property high. For example 1. Buy distress houses at around 45% under the repaired market value, 2. Your fix up within 30% cost 3. Your buying costs, holding costs, selling fees, and financing fees (commercial lending) total around 14%—your net profit margin around 11% of the repaired sale price.
Distress property is easy to recognize because it's often in need of clean up, updating, or refurbishing. A rookie investor should always start with a real estate agent if you want to save time learning the ins and outs while you minimize the chance of errors. Time is money in real estate, and mistakes in this business can make you lose big. Interest on the loan can eat away at your net profit when you do not do things on time. Also, when you underestimate the cost of repairs or did not factor the unforeseen cost into your plan—doing the wrong type of upgrade that does not support the market are all deal killers.
Real estate agents are well-rehearsed in buying and selling real estate property. They often time have to advise on how to fix-up a home for sale to be attractive in the market. They have years of study that the average rookie investor does not have. Without an agent, a rookie would have to spend the time to study, research, and to know how to apply the knowledge. A real estate agent can help you find lucrative distress houses when they are motivated. A real estate agent's motivation is money because they are self-employed in most cases. They only get paid off results, meaning commission. The real estate agent gets paid a commission of the sale price of the distressed home as your buyer's agent. Most distress homes do not have a significant sales value, and you would like your agent to low ball the purchase price.
Let's be frank. Unless you make an agreement that the agent will be used to sell the repaired house as well, they will not have much time to spend on finding a distress house deal for you. Some agents may require a retainer fee to cover their upfront expenses because finding an evaluating a distressed property is a technical task. Some agents will refund the upfront money if the agent is used to sell the repaired house.
It is very challenging to find a distressed house and know what to do to fix it up. If you want to research on your own, then the regular places to look are at auction websites, newspapers for foreclosures, and tax sales. Most of your research will be online and also driving around your state to identify distress looking houses, then contacting the owner to propose an offer. There are a lot of people trying to make money flipping houses too, and that demand will increase the price of the distressed home.
A more automated way it can be done is the use of a real estate agent. The trained eye of a real estate agent has a sense of the repaired market value when searching for a distressed house. The agent can quickly confirm with their professional tools the repair market value comparison to determine the feasibility of a distress property purchase. Some agents are skilled in assessing a rough estimate of what it will cost to restore the distressed house, which saves time when sifting through many properties. It is essential to develop a quick technique to determine a rough idea of how much money to repair a distressed house. It will help you to bid on specific properties that you are not able to inspect in detail before a purchase bid submission. Time is of the essence in real estate from a bid or offers to acceptance in every real estate transaction. If you do not perform in the time frame agreed, you stand to lose your security performance money called earnest money deposit.
With the assistance of a real estate agent, your guesswork of what is an acceptable fix-up disappears. The wrong fix-ups cause houses to stay on the market for a long time and, in the end, may have to either correct it or sell it at a discount. Anyone of one of those alternatives to the wrong fix-up takes away from your profit margin. For instance, if you chose a color paint that's not complimentary, you would experience a lot of financial regrets. Also over-improving, or under improving a home is equally bad for your business. It is best to rely on your real estate agent, giving you market comparison data that usually have interior and exterior pictures of what works in the market. Using compared property data, you can review it with a contractor to get a realistic estimate of the fix-up cost to your distress property.
Commercial lenders are great to use to fund your flip projects. The average funding terms are six months to 12 months. Since the funding is short term loans and applies solely to refurbishing, it is a requirement that you start a Limited Liability Company for your projects. The commercial lenders will make loans for flip deals to companies and not individuals. It makes it easier for a commercial lender to recover their losses on a business loan agreement legally. When you have a regular home loan, it falls into a different legal category that could be a lengthy legal process for the lender to recover their losses on a defaulted loan. For the most part, most investors that are great project managers are successful using commercial lenders.
The key to being a good project manager is to be surrounded by the right people. A successful investor once said, "You don't have to know how to do everything. All you need to know is how to hire the right people to do the things you don't know how to do." A good project manager knows that time is money, and time wasted is profit wasted. To control time in a project, you must have a plan to apply how the project will proceed within a time frame linked to each task. Commercial lenders scrutinize first-time investors more than season investors because of no track record.
The commercial lenders are interested to know that you can manage the refurbishing of a house promptly, within budget, and with an aesthetically appealing finish that is comparable to the market. It is best to get with a loan officer of a commercial lender to know their criteria options available to best suit the upfront money you will need to contribute to get the project started. The average startup capital is approximately $50,000 to get going. Of course, it depends on the deal, the location, and the market conditions.
You should always budget for the unexpected, so if needs be, you have an Exist Plan where you can at least break-even if unforeseen issues pop up. For example, you tore away some drywall and discovered a problem that is going to cost a lot to correct that is could push you way over your budget.
The unforeseen happens to the best of investors, but what makes the difference is how you navigator through the problems that put you in the ranks of a rising profiteer star in flipping houses.