How To Flip A House
The No-Hype Guide To House Flipping
Steps to Flipping a House
Welcome to our no-hype guide to house flipping. In this article we will cover each of the following steps to flipping a house:
Step 1 – Define the process and the purpose. You need to make sure you know what house flipping is, and more importantly what it isn’t.
Step 2 – Assess your current situation. You need to know how much capital and time you can currently devote to flipping, as well as what skills you have and what areas you might need to get some help.
Step 3 – Find a discounted property. You’ll most likely need to find more than one and then as you begin each phase of due dilligence you will eliminate any that are not worth pursuing further.
Step 4 – Get the property under contract. This step will require you to make an offer and have it accepted and then gather the remaining information you’ll need in order to get funding.
Step 5 – Get funding for your rehab investment. This is when you apply for the loan and look for the funding option that will work best for your situation.
Step 6 – Rehab the property. It is important that you run a tight ship in this phase, so that you stay on schedule and stay on budget.
Step 7 – List the property for sale. Stage it, market it, show it and sell it! The quicker you sell the property the more profitable you will be.
Step 8 – Finalize the sale and turn the property over to the new owners. This is when you will get the proceeds of the sale and can calculate how much money you actually made.
How to Flip For Less Than $5k of Your Own Money
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So those are the steps, quick and simple. But as you probably guessed flipping a house is not quick or simple. We promised a comprehensive guide, so read on as we cover each of those house flipping steps in more detail.
Get A Clear Picture Of What It Means To Flip A House
House Flipping. You see references to it everywhere. It has made it into pop culture, television shows, and romance novels. Even movie stars are flipping houses. And of course HGTV is HUGE. But you know what? Not everything you see is actually “house flipping” So, let’s define house flipping.
What does it mean to flip a house?
Flipping a house means purchasing a property at a discount and selling it for a profit. Period. That is the “flipping’ part. The renovations and the improvements are not the flip. Now, in order to be able to sell a home at a profit there is usually work that needs to be done to get the property into a condition where it can sell for a higher price. Higher than the combined costs of buying the property and fixing it up. But”flipping” does not mean “repair and redecorate.”
Many of these hows are home renovation shows. When Chip and Joanna help some home owners renovate their home they are not flipping it. (In fact, the homes they rennovate often have a difficult time selling because they are redone to the point where they are no longer comparable to other homes in the same market. That is not a situation you want to find yourself in when trying to make the quick sale required for a house flip.) If those fun twin brothers are helping a couple find the right home and fix it up they are not necessarily flipping it unless they are buying the house themselves first and then selling to the couple for a profit.
How do we know that people are confused about this? We get requests almost every day on our social media platforms from people asking us to “come and flip my house please” And we have to explain.
Now HGTV does show some house flipping as well. They will even at times show a house flip that results in a loss. But they really do not show the complete picture. They don’t show all the work that goes into finding the property for one thing. And that is actually one of the most crucial steps to flipping a house. In fact, if you don’t do that part right you won’t make money.
So, first and foremost, make sure you understand what house flipping is and don’t minimize in your head how hard all the work is, not just the part where you are tearing out cabinets.
Secondly, you need to understand that house flipping is a business, that like any business or investment there is risk, you can lose money. In fact, every real estate investor loses money on deals from time to time. It is important for you to go into house flipping with clear expectations.
Figure Out Your Strengths and Weaknesses
In order to complete this step you’ll first need to understand all the different aspects of house flipping. What are the resources you need to have and the skills involved with successful real estate investing?
Marketing – This is not usually the first thing that comes to mind when you think about the skills and resources you need to flip houses, but it is crucial. You need to be able to find the deeply discounted properties that allow you to be profitable as a house flipper, so you need to look in a variety of places and have a lot going on in this arena. Marketing takes time, money and networking. If you don’t have a lot of money (or any) to spend on marketing you’ll need to devote substantially more of your time.
Negotiating – You will be working with sellers, buyers, contractors and real estate professionals, so you’ll be entering into a lot of contracts and developing a lot of relationships. Some people are better at this than others, some are even naturals. Are you comfortable negotiating? What can you do to get better at this? Like everything else this is something that you will get better at over time, especially if you put effort into improving.
Accounting – Guess what? There’s math involved. We know you are not really suprised because we are talking about money. Make sure you understand how profit is calculated for flipping houses. It is not just “minus the property purchase from the property sale” there are many other costs that will determine whether or not a deal is a winner. Commissions, taxes, insurance, holding costs etc. all come into play. Get a good record keeping system in place. Get help if you need it.
Rehabbing Skills – These are the things most of us think of when we picture ourselves flipping a house. Whether it be the ‘get dirty’ work of tearing things down, or the finer art of decorating and staging a home for sale, a myriad of tasks go into making a distressed property one that people can envision as their home. Not only do you need to be realistic about what home improvement or tradecraft skills you possess, but you also need to assess what is realistic. Take time to learn the laws in your area that govern this type of work. What permits are required? Some things like electrical or plumbing require specific knowledge. There are safety concerns as well. And whether your state, county or city government will allow you to do all the work yourself or not, many lenders will require that a professional either complete the work or at least oversee it. If a deal requires you to cut too many corners, use poor quality materials or forego solid craftsmanship in order for you to be profitable then it really is not a good deal to begin with. Remember, you want to increase the value of the property, you will have an easier time selling the property when the rehab is done properly.
Capital- Flipping houses requires money. It does not necessarily have to be all your own money, but money is necessary. And you also need to understand that not all house flipping costs can be covered by the loan that you may get from a lender to help you buy and rehab the property. You’ll always have costs not associated with a specific property like marketing costs. You’ll have costs that will come up before the loan is extended, like inspections and some miscellaneous fees related to property access or similar needs. You’ll most likely have to come up with earnest money just to get the property under contract so that you can begin your in depth due diligence. And depending on the terms you can get, and on the lender that you use, not all of the property purchase and rehab costs may not be covered by the loan. And then you need to be prepared for costs that may arise once you have secured the funding and begun the rehab, like finding a more severe plumbing problem or something similar. The point is, even with great financing for your flip (like the funding we can offer here at DHM) you will always have costs not covered by your primary loan. So you need to know how much capital you have available as well as where you may be able to obtain more. It does not need to all come from your own pocket. Credit cards, lines of credit and other means of funding are great to have available.
Resilience – Easily the most important item in this list. It is the trait that will keep you going and help you overcome all of the challenges presented with all of the other items in this list. Sure the high level concept of house flipping is simple- buy low and sell high. But the reality of flipping a house and real estate investing is that it is constant ups and downs. Particularly your very first house flip. It will not go smoothly. You will experience set backs….be told “no”….realize the deal you are pursuing is a losing deal and you need to walk away. You’ll even lose money from time to time, because this is investing and losses and profits are sides of the same coin. Over time you’ll learn how to mitigate your risks and minimize your losses, but if you give up when you experience your first major set back, that cannot happen. Do you know how to regroup? Are you capable of taking responsibility for your own success? Can you shift gears and try to find solutions?
Flipping a house will take skills, resources and money. Some of the things needed will be talents and capacities you already have. There will be other aspects where you’ll need to get help.
You and you alone are responsible for your success. No matter what kind of help you get from third parties, your role as the business owner is to find solutions to the inevitable problems that will arise when flipping a house.
Find A Property That Meets Your Criteria
Finding properties for house flipping can seem like one of the most difficult aspects of investing for many people. Understanding what makes a property ideal for a rehab investment is crucial to your success. Seasoned investors will tell you that they review anywhere from 40 to 100 prospective properties in order to find one that will work for their investments. This is where your marketing efforts will bare fruit.
Don’t make this common mistake.
A huge mistake many new investors can make is getting too excited about the first estimates of profit for a deal and then not heeding the signs that the first projections might not be correct. If you fall in love with any particular deal you’ll not be able to walk away from it. And learning to abandon bad deals is part of a successful real estate investing business.
What criteria does your potential property need to meet?
The property needs to be available at a deep discount,so that any renovations completed will not cost so much that you could no longer sell it profitably. But also important is finding a property that has a large potential buyer pool, so that it can sell quickly. A quick sell is nearly as essential to a profitable flip as is timely rehab project and finding a property obtained for a discounted price. Walking the property with a contractor and careful review of comparable recently sold and listed properties will help you determine whether or not to get the property under contract and continue due diligence. You’ll want to employ a variety of property finding strategies in order to have as many potential deals as possible.
Use tools to make the process smoother.
Using tools to help you assess values, plan the rehab and figure the profits can help accelerate this process. Use the lowest comps, so that when you figure profits you have realistic expectations. Make certain you understand anything about the neighborhood or area that can impact values and make a property that at first glance may seem to be comparable one that actually should not be part of your calculations. Most communities have neighborhoods near one another where the property values differ widely. Working with a real estate professional in any area with which you are not familiar is always a good idea. Someone who does not have an interest in whether or not you complete the deal can be a big asset when it comes to accurately assessing values. A real estate agent who will make a commission whether or not the deal is profitable for you, or a contractor who stands to profit even if you do not might not be able to be as objective as is needed.
Set your ARV off of the lower comps
The ARV (After Repair Value) of a property is a key figure in your calculations. Basically it is what the property will be worth once you have made the improvements. Profitability should always be determined based on the low comps, not the highest ones. You look for houses in the area that recently sold or that are currently listed for sale to get an idea of what houses in the neighborhood are worth according to the current market. If you are profitable when the property sells for the low price you’ll just make more profit when it sells for more. If you need everything to work out ‘just right’ in order to make a profit then the deal is not a good deal.
Finding houses will be an ongoing process for as long as you are running a real estate investment business. Like everything else it is something that you will get better at over time. You need to be objective when reviewing properties. Stick with it, it’s worth it.
Get Your Property Under Contract
Some new investors approach this step with trepidation. This is where negotiating skills are needed, and that can intimidate some people, and maybe even keep some from proceeding. This is also where you’ll encounter a need for earnest money.
Earnest money is money given to the seller to hold while you complete all of the assessment and inspections for the deal to determine whether or not you are going to flip this house. Don’t be so afraid of losing your earnest money that you don’t advance. Careful wording of your contract and swift completion of your due diligence will protect your earnest money. Don’t be afraid to offer less for the property than the seller is asking. In fact, you’ll want to do so, as that is what will give you the negotiating room you need. Negotiate your earnest money deposit as well. You will most likely need to present a proof of funds to the seller in order for them to agree to putting the house under contract.
Get help if you need it or unsure.
You may even want to have a third party hold the earnest money rather than just handing it over to the seller. Because if you decide not to pursue the deal and you’ve stayed within the terms of your contract you will be getting the money back. This is again a good step where it pays to have a real estate expert knowledgeable about the market in which you are operating.
Don’t let fear hold you back. Review all contracts to make sure you are protected. You’ll be making many offers, some of which will lead to deals and others that you will need to back out of.
Obtain The Funding You Need
Hard money loans are one of the most common funding options for house flips, due to the short term nature of the loans. Some house flippers find a private money lender that they work with, although someone who does not know how to properly structure a loan and put things in writing is never a good option. Some house flippers use lines of credit, unsecured or secured. Small flips might be funded by credit cards. It is extremely common to use more than one type of financing to complete a deal.
Make certain when you are looking for funding that you take into account all of the costs of doing the deal, and also the costs of NOT doing a deal. Simply making a decision based on points and interest rates can be very short sighted.
First, you need to understand that hard money interest rates are always high. This is because of the higher risk that the lender is taking by extending the loan. Loans for investment properties carry more risk than those for a primary residence. Also, a lower interest rate over a long period might actually cost more than a higher rate over a short term. And, if the hard money lender is going to charge you interest for the entire loan term even if you pay it off early, or has other pre payment penalties you need to consider that in your vetting.
Additionally, you need to find out whether or not the lender will even extend a loan to you in the first place. Many new investors take advice from other people from real estate forums and groups (great resources when used skeptically and wisely) that tell them that they can get better rates, or to try to negotiate for better terms. That’s useful advice, and might work for some borrowers, but it usually will not work for your first flip. Particularly if you don’t have a large down payment to offer the lender.
Situations where you can try to negotiate better terms
- You are an experienced house flipper who can present a portfolio of successful deals
- You have a large downpayment you are bringing to the deal
- You have an excellent credit score (750 or higher)
- Your lender is someone you have a personal relationship with and not a company or lender with set policies (this is usually NOT a good idea. Relationships can be ruined this way, because real estate investing is risky. Proceed here with caution, use an attorney.)
Situations where you’re going to have more difficulty getting funding and negotiating won’t work
- You’ve never flipped a house before
- You don’t have at least 10% downpayment
- You want the lender to fund more than just the property purchase, you need funding for the rehab and other costs
- You don’t want to, or can’t, make monthly payments
- You have less than great credit
Questions you need to ask any potential lender.
There are many things that will affect how much a loan actually costs, not just points and interest.
- Do you disclose all of your fees as the time of the loan offer?
- Is there a prepayment penalty if I finish my rehab and sell the property before the end of the loan term?
- Do you require monthly payments?
- Can I extend my loan term if needed?
- What downpayment do you require?
- What is your minimum credit score requirement?
- Do I need to be an experienced house flipper?
- Do you review my scope of work and rehab plans?
- Do you loan based on the ARV?
- Do you help me determine whether or not the deal will be profitable after all costs have been paid?
- Can you also loan money for the rehab costs?
- What additional funding will I need and are there restrictions?
You can read more information about questions to ask a hard money lender here.
You’re not going to a “blank check” from any lender. Be prepared to use more than one funding source. Be prepared for unexpected expenses. 100% financing does not mean you won’t need to spend any money.
Complete The Rehab On The House
It is exciting to watch a house transform, and many of us would like an opportunity to experiment with interior design. This is why the house flipping and renovation shows are so popular. As stated before, there is much more that goes into it than you see in one of those quick TV episodes.
The work needs to be quality work with quality materials, and it should pass inspections.
Unless you are a licensed contractor or the rehab is just superficial we would highly recommend that you don’t attempt to do all the work yourself. Here are some of the reasons:
- Some counties and municipalities will not allow certain types of work to be done by anyone other than a licensed professional. Electrical, plumbing and HVAC are some examples. Check the laws in your area and the permits that you get.
- Many hard money lenders (DHM included) will require that you get a licensed contractor bid and scope of work, so that costing and scheduling can be as accurate as possible. In fact, many lenders will not release funds for work completed unless they have a reciept for the work and a contractor sign a lien release.
- The better the quality of the work on the rehab, the more chance you have of getting your asking price or higher for the home when you put it on the market.
- If you were planning on getting your hard money loan for the flip and using part of it to live on while you work on the rehab, you may need to adjust your expectations. Most hard money lenders will not just disperse the money to the borrower in one lump sum and let the borrower manage the money. In DHM’s case the rehab amount will go into an escrow account and be available through a draw process throughout the term of the loan. Work needs to be completed and inspected before funds are released. A small portion is usually released at the beginning to allow you to get the utilities turned on and purchase initial supplies.
The work needs to be completed on schedule.
Managing a large rehab project is a special skill in and of itself. If it is not well done it can cost you most, if not all, of your profit. An experienced contractor can be a big asset here. The aspects that need to be managed are:
- Keeping the project on budget. This means following the scope of work as closely as possible.
- Managing the work flow of all the subcontractors and workers involved so that they are not in each others’ way nor are they waiting on each other. It also entails making sure that subcontractors show up when scheduled.
- Keeping the project on schedule. A rehab completed on or ahead of schedule can be listed as soon as possible thus leading to a quick sale.
Quality rehab work completed in a timely fashion will take you a long way towards your goal of selling the property quickly. Don’t try to do work you are not qualified to do in an effort to make more money. You need to expect sets backs and ‘hiccups’
List The House For Sale
The rehab is complete and ready to go, what’s next? Selling it of course! What tips and pointers do we have for you here?
Setting your initial asking price.
Don’t be tempted to initially list your property for a ridiculously high price. Of course you want to make as much money as possible, but you need to be reasonable. How do you choose your asking price?
Remember when you went through the process of valuing the property and deciding whether or not to pursue the deal? You determined that you would be profitable enough even if the house sold for that lowest comparable price.
Take some time here to review the market again, particularly if it took you a long time to rehab the property. Have values stayed consistent? Gone up? Gone done?
Setting your asking price near the ARV will help you draw the interest of as many potential buyers as possible.
Work with an agent.
We absolutely recommend that you use an agent to sell your home. They have a great deal of knowledge, resources and connections to get your home marketed and sold quickly. As your business grows you may find that you don’t need as much professional help, but in reality you will most likely determine that a good, professional real estate agent will be worth what you pay them. They will help you with everything involved in listing your property – staging, getting the right images, getting it in front as many buyers as they can.
Make sure you take advantage of every listing opportunity you can. Bring opportunities to your agent.
How long is this going to take?
Having realistic expectations will serve you well here. If you have purchased or sold a home before some of this will be familiar to you, and there may be some things that are new.
- Show the house as often as you can. You want as many potential buyers to go through the house as you can.
- The time it takes for you to sell your house (from the day you first list it to the day it goes under contract) is called the “Days on Market”.
- Plan on it taking 90 days to sell your property. A slow market can take as much as 150 days and a hot market can be as low as 30 days. Even if there are some properties selling for faster than 90 days in your area, you shouldn’t count on your property selling that fast.
- Be prepared for potential buyers requesting additional upgrades or changes to the property.
- There are many things that affect days on market or how fast your property will sell. The three biggest factors are price, location, and condition. Properties with a low price, in a desirable location, in a good condition sell faster.
- Remember that the vast majority of potential buyers will be using a traditional mortgage to buy the home. Those loans will take 2-4 weeks to close from the time you get it under contract.
What offer should I take?
Take the first offer you get. Why? If that offer results in a profit for you, even if it is less than you originally thought you would get it is a good deal for you to take it. If your hard money lender does not have prepayment penalties it will possibly save you money. You will have the satisfaction of completing your first successful flip! You cannot put a price on that. Here is more information on why the first offer is the best offer.
You will need to work as hard to sell the property as you did to find it and rehab it. You will find that you learn as much in this stage of your first house flip as you have in all the others.
Sell The Property And Make A Profit
This is the step you have been waiting for!
What is the closing process going to be like?
- What do I need to take with me to closing? You will need picture ID. Any partners you have in the deal should be there as well, even if they may not end up signing anything.
- Plan on it taking 30-60 minutes to close.
- How quickly will I get my money? You’ll need to ask the title company how they disperse funds. Some will send it via wire to your bank account and some may give you a check. There may be some rare occasions where the funds are held up a few days.
- Do I need to pay anybody out of the money I am getting back? If there is anyone you borrowed funds from that is not listed on the closing statement for disbursement of funds through that process you will need to pay them back now.
- What can go wrong at this point? If there is anything pending that may hold up closing the title company will usually let you know beforehand and reschedule. Just about the only problem you may encounter at the closing table itself is the buyer not bringing the required cash to close, or perhaps even not showing up at all.
Your hard work paid off. Celebrate and do it again!
This is a basic outline of flipping a house. Of course, each and every real estate investment you pursue will be unique. You are going to run across situations and challenges each time that will be new to you. Like everything else worth pursuing, flipping a home will not be easy. We hope our quick guide will be the start of a informed journey, one in which you will continue to learn and profit.
Let us answer any questions you have about the house flipping process and all of the funding options we have. We can fund traditional hard money loans, deals for first time house flippers, those with bad credit and even can provide funding that has no or low cash to close. We will help you learn how to flip a house and fund your deal!