Can money be made in flipping homes? Yes. Is it as easy as the shows lead on? No. Here are some tips to success when it comes to fixing and flipping for a profit…
1. Find the right house.
Congratulations on deciding on flipping houses. Now you just have to find one. This is actually one of the most difficult steps because not only do you have to find a house that needs revamping, you also have to find one that can be purchased at the right price. And that has repairs you (and your contractor) feel comfortable doing. I’ve been flipping houses for a long time, but still recently walked away from a home with weird mold issues.
If this is your first time rehabbing a house, it’s better to either partner with someone who has a lot of experience or start off with a home that doesn’t need a ton of work.
Be sure you know what you are getting yourself into. Have a thorough home inspection and be there with the home inspector so he can point things out. He won’t be able to find everything (you can’t see through drywall or flooring), but you can ask questions and start to get a feel for the general condition of the house before you buy it. Let the inspector know what you plan to do with the house. Investor inspections can be very different than owner inspections.
A great time to buy is in the late fall or winter—there isn’t as much buyer competition later in the year, and sellers who have their house on the market at the time may be resigned to selling it lower because they have to get it sold. Spring is the prime selling season, and if you can get it completed in time, you can capitalize on when the most buyers will be looking.
Long term flips are great for avoiding capital gains taxes, but they aren’t without risk. I purchased a house in late 2006 to live in and flip—remember what happened in 2008? The market completely changed during my flip, and my many hundreds of thousands of dollars in potential profit were swallowed up by the poor economy. There is a lot to be said for getting in and out quickly.
2. Understand how to use the 70% Rule.
If you have spent any amount of time on the Forums, you have seen the 70% Rule bandied about. And while some flippers swear by this rule, it is a rule of thumb more than a hard and fast rule. It basically states that you should pay no more than 70% of the ARV (After Repair Value) minus the cost of repairs. A $300,000 ARV * .7 = $210,000. With $50,000 in repairs, you should make an offer of $160,000.
This is all fine and good in a normal market, but our current atmosphere is skewed toward sellers, which means they don’t have to take your ultra-low offer. In fact, you will be competing with buyers who can pay a whole lot more than $160,000 because they aren’t trying to make a profit when they sell it in 6 months. They want to live in it and will offer much closer to that $300,000 than you can ever consider.
I have never followed the 70% rule, and I have still made money every single time. I’m not saying you need to throw that rule out the window, but take it with a grain of salt. The lower the price of the property, the closer you have to stick to that rule if you want to make money.
3. Properly estimate costs.
Here is where things can go sideways really quickly. If you have never been inside a Home Depot, you probably don’t know how much materials cost. And if you don’t know how much the materials will cost, you are going to underestimate. When you make a math mistake in flipping, it never turns out to be in your favor. Murphy’s Law rules the world of flipping houses.
While you are looking for that perfect house flipping candidate, browse the aisles of Home Depot. Look at all the options in the flooring department and you will see that it varies considerably. I have seen tile for as little as $.78/sq ft. I have also seen tile cost as much as $60/sq ft. For a 10 x 10 floor, you are looking at $78 vs. $6,000. That’s a HUGE difference. And that is just one rather small aspect of the job. Imagine if you budgeted everything at the low end, and then chose everything from the high end? Your budget is blown, and your profits are gone. And we’ve only talked about flooring. Look at everything you think you will be making changes to. Cabinets have a huge variance in price from RTA (ready to assemble) to off-the-shelf to custom. Bathroom vanities, mirrors, even paint has low, medium and high quality choices.
Are you building walls? Make sure to account for all the materials involved. A 2 x 4 stud only runs about $2.50, but you can’t build a wall with just one—they go in every 16″. Plus you need boards for the top and bottom. Nails, too. Are you putting a door or window in that wall? You’ll need a header. Those boards cost more.
If you are using a contractor, they should know these things, and if they don’t, this is a good way to weed them out. They should account for all the materials they will need when they write up your bid, so make sure you know what you want them to do before you make your budget.
Be cautious of hourly contractors. It may seem great on the surface, but those arrangements can backfire. I paid an hour contractor way too much money for a shoddy job once. Now I get bids for the entire job.
4. Account for time.
Here is another place you can lose huge. If you think it’s only going to take you the two months the contractor quoted you to flip that house, think again. I have never had a contractor give me a time quote that was accurate. Since I live in my flips to avoid capital gains taxes, I have to be there for two years. An extra month on the timeline is annoying, but it isn’t a huge deal. My mortgage costs are the same if I am working on the house or if it’s finished.
But if you’re flipping a house with a budget of 3 months of holding costs and the flip turns into 6 months of holding costs, that can blow through a large chunk of your profits.
One way to avoid this is to find a quality contractor. Good luck. Ask at your local REIA meet ups for recommendations, or check out the new BiggerPockets Local Real Estate Networking & Recommendations Forum, which is divided into all 50 states, then sub-divided into the largest cities in each state. You should be able to find a sub-forum close to you.
Finding a quality contractor doesn’t guarantee they won’t run into problems and extend the timeline; some things are unavoidable. But a quality contractor is more likely to keep you in the loop.
Build some extra time into your budget. If you don’t need it, that’s just more money in your pocket. But trust me, you’ll need it.
-Charles Delong (Arizona Top Producing Realtor)
