House Flipping 101

Here is your beginner's guide on how to flip a house.

So aside from watching them make it look easy on HGTV, you don’t know the first thing about how to flip a house. That is OKAY! You’re in the right place. With shows like Flip or Flop, Flip this House, and dozens of others, it looks like an exciting new hobby to get involved in. Not to mention, it’s profitable. Who doesn’t want to knock down some walls, throw on a coat of paint and get a giant paycheck!? Spoiler alert: reality television isn’t always reality. Though the goal is to tackle the project in a timely manner, flipping isn’t always the fairy tale you see on TV. Often there are hoops to jump through like liens, permits and code violations. Be thorough in your preliminary investigation. Talk to a professionally licensed real estate expert before taking the plunge. 

There can often be more than meets the eye in the physical structure as well. Believe it or not, most real estate investors who flip houses often do so without ever stepping foot on the property. Particularly in the climate of today's seller's market, if you’re not first, you’re last. In our area, only a few years ago, the crowd of bidders on the courthouse steps waiting for the auction to begin was typically less than a dozen people. Now, there are closer to fifty real estate investors vying to be the winning bidder. It is highly advisable to have a solid knowledge of the market before you invest in a potential flip. Consult with a licensed Realtor or professional real estate sales agent for a competitive market analysis before making an offer. You would be surprised to learn how many real estate investors dive right in and lose money because they put the cart before the horse. The service is free and much more comprehensive than an algorithm. Though a Zestimate or similar tool can provide a general, ballpark gauge for potential value through AI technology, it does not weigh in with market factors that only a real estate professional can tell you. 

Once you have established that there is growing appreciation in the area and the property has income potential, it is wise to take it a step further: you should investigate the fair market value and the sale history of the property. This is public record and easily accessible through most county auditor websites. You may be able to see some proverbial red flags if this particular property seems to change hands frequently. If a property history reveals that there have been several attempts at selling it that have never come to fruition, this pattern may be pointing to bigger problems.

A major consideration before investing in a property is whether you are planning on doing the rehab work yourself or subcontracting this to skilled laborers and craftsmen. Most house flippers go into this facet of real estate investing because they personally can repair or renovate most of the property themselves. This saves thousands of dollars on parts, tools and labor costs. If you are planning on hiring a team of contractors or a general contractor to oversee the project, make sure you overestimate the associated costs to plan for the unforeseen. It is wise to have a spreadsheet of your budget for expenses with a built-in cushion for anything that may arise that you didn’t anticipate.

This may be materials, a last-minute emergency plumber, an exterminator-you name it! You should also include travel expenses as you are about to start accruing frequent flyer miles on your trips to The Home Depot. There are so many considerations when flipping a piece of real estate, I decided to ask an experienced real estate investor for just his top five tips. Brian Boland, started flipping homes in his early 20s. 30 years later, he and his designer wife, Beth Boland are both active players in the real estate flipping industry. Brian went on to earn his MBA in Urban Planning and is highly involved in the revitalization effort of local communities. They never read any books on it and they didn’t attend any big hotel conventions. They learned by doing. Here are 5 key tips from a seasoned veteran on the subject:

Rehabbing can be a very rewarding process. Nothing feeds your sense of accomplishment quite like taking something that was undervalued and putting some time and effort into it to create something new and exciting. Rehabbing can also lead to stress, both mental and financial. It can eat up your time without you realizing it. It can lead to domestic strife as you commit more time and resources to a project. And rehabbing can leave you heartbroken and bereft with nothing to show for it if you don’t do it right. So what's the trick, what is the secret to getting it right? If I could go back to my 20-something-year-old self and give some advice, here are the top five things I would tell myself:

Top five house-flipping tips:

1. Know your area. Nothing about rehabbing is guaranteed, so when starting work in an area you are familiar with. It will make your first projects easier if your comfort level is high.

2. Don’t get in over your head on your first project. Find that house that needs just enough work that it hasn’t sold yet, but not so much that you will need to put a bed in while working on it. If you are a part-time rehabber, this will ensure that you don't lose every weekend to your project; if you want to make this a full-time job, have a start time and a finish time, and keep to them. It’s a job, so treat it like one.

3. Know your abilities. One strategy for keeping costs down on a rehab project is doing some work yourself. If you decide you want to do that, be certain that you can deliver the quality of work that is required and do the work in an appropriate time. Yes, we can all watch a YouTube video on how to hang drywall or how to build a wall, but that doesn’t mean we all can.

4. Focus on the important rooms. The kitchen, the master bedroom/bathroom, and then whatever common room is applicable, be it a living room, family room, great room, in that order. There may be cool things you can do in any room, but avoid unnecessary changes. The Kitchen and Master bed/bathroom are the spaces where your customers, the buyers, will do most of the living, so get those right, and the rest will take care of itself.

5. It’s all in the numbers. We can love rehabbing all we want, but at the end of the day, you have to be better off when you are done than when you started. The way to assure that outcome that is to watch your pennies. Have a budget; know what “As repaired value” is; be able to calculate how much your property will likely be worth when you are done. If the end value doesn’t cover your purchase cost, the labor and materials, AND leave you with a good profit, don't do it. A good upfront analysis of your costs and likely return will guide you away from marginal properties and toward profitable ones. And that’s better for everyone in the end.

That’s a good start for anyone looking to rehab. The rest you can learn at the School of Hard Knocks as I did. If you are looking for more information we have an article that outlines how a realtor should handle and benefit from a relationship with an investor. You can read that article here.

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